Discuss about the Compensation Policy for Built Construction Company.
In this paper, a brief discussion is to be done on the compensation policy of a famous company named the “Strong Built Construction Company”. There are issues regarding the compensation policies of the executives of the company. For resolving this issue, a number of factors are required to be considered for the success of the enterprise. As an assistant to the Chief financial officer of the company, a report is to be prepared for addressing these issues. Second part of this report contains analysis of two case studies or research papers. Under both research papers more emphasis is put on audit expectation gap that has been faced by users of financial statements. Analysis of both research papers includes analysis of response rate, sampling method, analysis method and identification of flaws in research papers.
a) Typical elements of compensation packages
As an assistant to the Chief Financial officer of the Strong Built Construction Company, an approach to the executives’ compensation is developed. The typical components of the executives’ compensation packages are identified as follows:
Basic pay or salary – The executives are paid the basic salary predetermined as per the terms and policies of the company. It is considered to be the largest part of the total package which is to be paid on an annual basis. Other benefits such as perquisites are calculated on the basic pay and accordingly it is considered to be the main part of the executives’ compensation package.
Short term benefits or bonus – The executives are also paid other short term benefits in the form of bonuses etc to appreciate their work and dedication and consequently motivating them to work more efficiently for the welfare of the company (Zou et. al., 2015).
Long term benefits – The executives or employees are also given long term benefits in the form of equity or other organisational value which boosts their morale and their efforts are focused on minimising the employee’s turnover, which would be very beneficial for the success of the company (Graham et. al., 2012).
Other employee benefits - Other employee benefits such as medical reimbursements, insurance policies, employee stock options plans, vacations on paid basis, etc also constitute a major motivational factor for the labours as well as the highly skilled professionals of the Strong Built Construction Company.
Perquisites – Employees are provided other benefits such as mobile bill reimbursement, mobile set, conveyance facility, accommodation facility, medical facility etc, which is also treated as a part of compensation package.
b) Outline the key assumptions of traditional agency theory and their influence on approaches to compensation.
The traditional agency is highly influenced by the narcissist acts of the executives. The agency theory represents the relationship between the executives of the Strong Built Construction Company and its other stakeholders. As per this theory, following assumptions are done:
The executives and other stakeholders are equally responsible for mitigating the risk factors and minimising their effects on the success of the business.
Executives are assumed to be narcissist and they formulate their compensation policies keeping in mind their personal benefits (Kumar & Zattoni, 2016).
Every person has different calibre and responsibilities. Everyone has a different way of performing his duties. The compensation of the executives and other agents should be decided in an unbiased manner.
An approach for setting compensation policy is also influenced by the traditional agency theory. All the executives are assumed to be paid on an equal basis, as their designation and responsibility is same. But it is not accepted by all the executives, as they are liable to perform different tasks and they should be paid according to their performance (O'Reilly, et. al., 2014). Agency theory doesn’t promote this fact. Hence, most of the companies do not follow the traditional agency approach for taking decisions about the compensation of the executives and agents.
C) Explain the difference between extrinsic and intrinsic motivation and the relationship between the two motivations.
The executives and other stakeholders of the company should be motivated to work more efficiently to gain more benefits. They would be motivated in two manners: Extrinsic and Intrinsic motivation.
Intrinsic motivation – Sometimes the job of the executives itself consists of the motivational factor, which motivates them to achieve the predetermined goals of the business.
The employees can be self – motivated by setting an approach to maintain the value of the activity done for the success of the Strong Built Construction Company.
Development of interest in the work also helps in increasing the motivational level of the employees (Taylor and Westover, 2011).
When the employees feel satisfied with their job and rewards, it can prove to be a good intrinsic motivational factor.
Extrinsic motivation – The consequences of the executives’ performance help in developing extrinsic motivation for them.
Like the payment of the employees or executives’ compensation at the right time is also a motivational factor for them (Vanthournout et al., 2015).
Right amount of money or reward also motivates them to work more for gaining overtime allowance and thereby increases the productivity of the business of the Strong Built Construction Company (Néron, 2015).
The challenging factors in the external competitive environment also motivate the employees for earning competitive advantage.
There is a relationship between the extrinsic and intrinsic motivation in the manner that both lay a positive impact on the overall personality development of the employees and executives. When an employee is motivated by intrinsic factors, he will also be definitely inspired by the extrinsic motivational factors. These play a crucial role in the success of the enterprise (Zou et. al., 2015).
(d) How might an employee’s attitude to risk influence their desired compensation package?
The compensation package of the Strong Built Construction Company is also influenced by the employee’s response to the risks evolved during conducting the business activities. Normal or abnormal risks arise in the business and the employees are expected to response to them with a problem solving attitude (Bolton et. al., 2015). When the employees’ attitude to the business risks is negative, they will not be able to develop a sense of responsibility towards the organisation and consequently it will adversely affect their compensation package.
The Strong Built Construction Company can also initiate programs in which proper training is given to the employees on the subject, how to deal with the risks and mitigate them (Fowler, 2015). The collaborative efforts of the employees can face any challenge and the company will achieve its targets more easily. The company should reward the employees on their responses to the risks raised in the business in the terms of money, which would in turn help in increasing their morale and dedication for the company (Dye & Sridhar, 2016).
(e) How might the time period when employee receives a financial benefit influence they desire for the benefit?
The employees work for the Strong Built Construction Company very efficiently and in return, they expect their financial benefits. Sometimes the company make delays in the payment of financial benefits, which irritates the employees and their performances in the future (Gopalan et. al., 2014). This may create a hurdle in the growth of the business of the company.
So, it is suggested as an assistant that the Strong Built Construction Company should pay the financial benefits to the authorised employees within reasonable time period.
(f) What role do fairness considerations have when determining compensation?
As per the equality policy, there must be fairness in determining the considerations of the executives and employees of the Strong Built Construction Company. When there will be fairness in the compensations of both, the employees will feel a sense of responsibility and their hard work will pay off in the form of greater profits to the company (Boyd, et. al., 2012).
Therefore, the Strong Built Construction Company should place a cap on the compensation of the executives. This fact should be considered while forming the policies and procedures for the compensation packages of all the authorised members of the company (Ghosh, 2016). The equality policy helps in the maintenance of a friendly atmosphere in the organisation, which helps in the success of the business.
(g) The benefits that might be expected from using an executive compensation committee
The Strong Built Construction Company is facing the compensation issues of the executives. Therefore, constitution of an executive compensation committee would be a better option for resolving these conflicts. A friendly environment is expected with the help of the committee, as every member will have the equal rights to express their opinions on the subject matter. The executives will not be able to impose their narcissist activities on the employees of the company for their personal gains (Rhee, 2016). It is expected from the committee not to provide excessive compensation to the executives. They should be provided financial benefits according to their performances during the year. It is also expected that all the employees and executives will feel independent to perform their jobs (Dittmann, et. al., 2013). The committee is also expected to abide by all the regulatory laws and norms.
(h) How to structure an executive compensation committee to achieve reasonable but not excessive compensation, while still retaining executives
The executive compensation committee should be structured after considering the following steps:
First of all, the regulations of forming the executive compensation committee should be taken into account to avoid any consequences.
A list of the potential members for the committee is required to be prepared. Their qualifications and experience should also be counted for this purpose (Kuo and Yu, 2015).
The responsibilities and duties need to be elaborated to all the members of the compensation committee. Possible alterations should also be discussed in advance (Kastiel, 2015).
The issues which might arise should be discussed properly and an approach to solve them should also be developed.
Decisions about the meetings of the committee and their compensation should also be taken.
A provision of hiring a compensation consultant at the time of need should also be introduced (Lee, 2014).
While taking all such decisions, it should be kept in mind that the executive’s interest should not be harmed. They may not be provided excessive compensation, but they should be provided adequate consideration as per their performance.
a. What is the aim of the research paper/project?
This research paper aims on testing the effectiveness of explanations that has been recently made in revised International Standard on Auditing 700. This revision has been based on expectation of users of financial statements and how it is made to understand the audit procedure. Now question arise, whether such changes will overcome limitation of current standard in real scene or not. In current standard, there is hug expectation gap in terms of auditor’s responsibility. Therefore following are main aim or purpose of this research paper:
To identify current expectation gap in the International Standard on Auditing 700 i.e. auditor’s report
To analyse the inclusion and exclusion of added explanation to International Standard on Auditing 700 will result in reduction of expectation gap.
b. Draw a table to illustrate the 2 x 3 design (p. 292) showing the six groups and the different information that each group received.
Complete unqualified ISA 700 auditor’s report
unqualified opinion-only version
c. What was the purpose of the manipulation checks?
In the current case study, manipulation check activity has been conducted. Under this activity, all the participants provided description of fictitious company along with financial information i.e. financial statement of such fictitious company. All other relevant information related to fictitious company has been provided to participants. Then participants are provided with auditor’s report (complete auditor report without implementing added explanation) i.e. opinion only report. Then complete auditor’s report was provided to participants (with full implementation of explanations of ISA 700). Then participants were asked to comment on both the report (Gold, 2012). Therefore purpose of manipulation check is to identify or take opinion of participants of manipulation regarding inclusion of explanation to auditor’s report under ISA 700.
Okafo and Otalor (2013) has the aim of making people or analyzing people that auditing is not a certificate job or process that certifies financial information of the company. Lack of knowledge among users of auditor report or public is the reason for increased expectation from auditor. Aim of this study is to analyze people to be more educated in terms of auditor’s duties and responsibilities of auditors.
Agyei, Aye and Owusu-Yeboah (2013) study has the aim of assessing expectation gap in terms of audit in Ghana is the main aim of this study. This study focuses on the difference between two fraud detection by auditor and verification of financial statements by auditor. This different expectation has created huge gap and this study is focused on such expectation gap (Agyei et al., 2013).
attempts to measure the audit expectation gap
Okafo and Otalor (2013) – This study tries to measure audit expectation gap by involving or putting emphasis on education and awareness level of people regarding duties and responsibilities of auditor.
Agyei, Aye and Owusu-Yeboah (2013) – This study tries to measure auditor expectation gap by analysing and integrating opinion of users of financial statements and auditors together.
c. Each study measures audit expectation gap by applying different technique. Following is the technique that each study has used:
Okafo and Otalor (2013) - Under this study, researcher has collected data using questionnaire (self administering) using simple random sampling technique. Sample of teachers and students were taken and questionnaire has been provided to sample population (Okafor, 2013).
Agyei, Aye and Owusu-Yeboah (2013) – Under this study, researcher also collected data with the help of questionnaire and population of sample is of users of financial statements in Ghana. Purposive sampling techniques has been used i.e. representation for each group has been established. Convenient sampling technique has been used to select respondent of the questionnaire.
From the above, it can be analysed that Agyei, Aye and Owusu-Yeboah (2013) approach is more rigorous as their sample is users of financial statements and not random teachers or students.
d. Response rate
Okafo and Otalor (2013) –
598 / 891 * 100 = 67.12 % of respondents – This is adequate response rate in order to form an opinion (Burke and Hodgins, 2015).
Agyei, Aye and Owusu-Yeboah (2013) –
Auditors = 20 / 50 * 100 = 40 %
Stock Broker = 15 / 50 * 100 = 30 %
This is not an adequate response rate in order to form an opinion.
(Baruch and Holtom, 2008)
e. Analysing data and who is more rigorous
Okafo and Otalor (2013) – Data that has been collected from the response and processed or information is generated using computer or SPSS software. Coefficient, z-statistics and t-ratio has been used to analyze results. This study uses capabilities of hypothesis analysis so as to achieve more accurate results (Son, et al, 2012).
Agyei, Aye and Owusu-Yeboah (2013) – For analysing the result of i.e. audit expectation gap, Likert scale has been used. Under Likert scale response will be analysed in the basis of single base. Here collected data is analysed with the help of SPSS.
Okafo and Otalor (2013) study is more rigorous as compared to Agyei, Aye and Owusu-Yeboah (2013) because in this study they have used computerised software which is way more relevant as compared to Likert scale. Likert scale shows balanced results i.e. at middle of the results.
f. Briefly outline two other significant flaws that you have noticed in the studies
Okafo and Otalor (2013) – This case is limited its scope in terms of education and awareness of users of financial statements but does not cover liabilities of auditors. More thrust of auditor’s responsibility towards society and business organization shall be put so as to make study more meaningful.
Agyei, Aye and Owusu-Yeboah (2013) – This study or research is limited to Ghana only which has limited the scope of its use. Another flaw is of sample i.e. only auditors and stock brokers have been selected. Other users of financial statements were kept out of preview of research.
From the above report, it can be concluded that the Strong Built Construction Company should form an executive compensation committee for creating a fair environment in the organisation where there would be no biasness towards the executives and a reasonable amount of compensation will be paid to both the executives and employees of the company. In terms of part II it can be concluded that both research papers has put effort in analysing audit expectation of different users of financial statements. Under both the research papers, sampling method, respondent population and data analysis plays important role.
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