You have just started working at the Sunnyside Company. The chairperson of the board has a degree in economics and agency theory has guided the determination of executive compensation. Executives receive compensation comprising salary and performance bonuses. The recent departure of two executives has resulted in discussions by board members about the effectiveness of the current compensation system in motivating and retaining the executives. In their exit interview one of the executives commented that the CEO was difficult to work with as he lacked empathy and was a bully. You have been asked to prepare a report to the board about executive compensation. To compile this report you will need to analyse the existing approaches and consider the findings of research about executive compensation. Several questions have been asked at board meetings about executive compensation. One member of the board asked, “Is it appropriate to use the same proportions of different benefits for each of our key executives, when they appear to have very different personalities and motivations?” Another asked why there was a large difference between the CEO’s compensation and the other executives. Issues were also raised about hiring a compensation consultant and establishing a compensation committee. One of the directors recommended their cousin, who recently graduated with an MBA as an ideal choice for the compensation consultant. The four key executives whose compensation needs to be determined are: Mr Bill Syme CEO. Bill has been the CEO for 10 years. Sixty years old, he is very charismatic and visionary. During the 2009 financial crisis Bill led restructuring of the company that saw the retrenchment of 50 employees. Since then Bill has been instrumental in growing the company through two acquisitions. Dr Kate Selling, the CFO, is 35 years of age. She recently joined the company and is a qualified financial planner. Mr We Lu, is 42 and recently immigrated from China where he worked in a similar role. Ms Sarah Jones, CIO has been with the company 12 years and is 57. She has a Bachelor of Computing. Your report to the board should contain the following: 3 1. Provide an outline of agency theory and its assumptions. Explain how the assumptions of agency theory have an influence on approaches to executive compensation. (Provide some examples to the board in your report from your e-readings for topic 7 as well as other readings where you think it is appropriate.) 7 marks 2. Discuss and evaluate research that questions the assumptions of agency theory and its approaches to executive compensation. (Your evaluation should include e-readings for topic 7 as well as other readings where you think it is appropriate in your report to the board.) 7 marks 3. To answer the question from one member of the board “Is it appropriate to use the same proportions of different benefits for each of our executives, when they appear to have very different personalities and motivations?” consider the following in your report to the board: Make use of Pepper and Gore’s study (2014) that addresses a number of factors that influence individuals’ attitudes to executive compensation. How might the findings of their article assist in structuring executive compensation at the Sunnyside Company? Consider the individual characteristics of the executives and comment on the type of compensation that each executive might prefer. (Support your comments to the board in your report from your e-readings for topic 7 as well as other readings where you think it is appropriate) 15 marks 4. Address the concern expressed regarding the large difference between the CEO’s compensation and that received by the other executives. Why might this difference have arisen and is it reasonable to allow it to continue? (Support your comment to the board in your report from your e-readings for topic 7 as well as other readings where you think it is appropriate.) 8 marks 5. What other factors about employees should be considered when determining executive compensation? (Provide information about these other factors to the board in your report from your e-readings for topic 7 as well as other readings where you think it is appropriate.) 8 marks 6. What would you recommend to the board in structuring the proposed executive compensation committee and appointing the compensation consultant, given the board’s desire for fair and reasonable compensation? Comment on the board member’s suggestion that their cousin be the compensation consultant (Support your comment to the board in your report from your e-readings for topic 7 as well as other readings where you think it is appropriate.) 10 Marks 4 General format and presentation criteria 7. Providing a professional presentation (e.g., proof-reading and using the appropriate format, referencing and presentation). 5 marks PART B Use the two papers about the audit expectation gap in Germany (Ruhnke & Schmidt 2014) and Nigeria (Adeyemi & Uadiale 2011). These papers are available through the Studydesk. 1. What were the research aims of each paper? 5 marks 2. How have the participants been selected for each study? 4 marks 3. For each of the studies comment on whether you believe the selection of the participants is adequate to address the research aims. 3 marks 4. For each of the studies comment on whether you believe the response rates are adequate to address the research aims. 3 marks 5. What are the key findings of each paper? 4 marks 6. How do the findings between the papers differ? 4 marks 7. What impact might the location of the study for each paper have on the findings? Consider Hofstede’s cultural dimensions shown under Topic 6, week 2 on the Studydesk. 6 marks 8. What are the limitations of each paper? 5 marks 9. Comment on the rigour of the studies. What has been done in each paper to ensure the findings are valid?