Discuss about the Role Of Executive Cash Bonuses In Provide Individual.
Provided part of report covers viewpoints of various authors on executive compensation and equity theory by considering relevant literature. Further impact of equity theory on performance of executives and Motivational strategies for employees has been discussed to resolve given case issue.
Executive compensation and equity theory
Executive compensation is believed contravened entirely in comparison to justice method within the equity theory. Although; the same is seemingly “fair” in contrast to CEOs of similar organizations who are completely in lopsided present job Market. Equity theory is one of the approaches which compare the ratio of output and input or the same can be expressed as the reward you received after providing the specified quality or amount of effort for accomplishing your obligation (Pepper and Gore, 2015). Further, the same is being compared with your coworker, family member or any other person. In case the result of ratios which have been derived are equal or equivalent then it represents the existence of equity; however, in case, the ratios are not equal than the same is referred as under-equity or over-equity. In case of under-equity, the results make believe the employee that the reward is not in order with the effort which is being made by you as the referent point is receiving even after making less effort than you have made. Guay, Kepler and Tsui, (2017) asserted that in over-equity the outcome received by the employee is more in comparison to the effort made for same and referent point person is attaining less even though the effort put by him or her in more comparatively.
Impact of equity theory on performance of executives
There is a serious question which has been raised regarding the base salary, incentives and benefits for executives and their implications as all these are main variants of motivation. The most important concern regarding the high pay level to chief executives is they might be supported for taking the business decision which is beneficial for them by ignoring company’s needs so that they can achieve performance goal which is needed to get the incentive pay (De Vaan, Elbers and Di Prete, 2018). This is especially for the incentives which are for short-term. For instance, to attain large bonuses executives might make up short-term profits which cannot be continued so that they can leave the organisation prior to long-term financial problems are exposed.
In this aspects Rau (2017) states that the existence of over and under equity leads to de-motivate the employees as the same and might have a negative impact on efficiency and performance of employees. In case an organization enhances the bar for executive compensation, then the other companies initiate to reassess the manner in which they see the bar of executive compensation. If executive compensation is intimately connected with the total revenue of organization for the year and it is possible to distribute the same to employees than moral and work effort should see the enhancement. Usually, the positive motivational consequence is connected with compensation pay. Further, evaluation of performance assists in ascertaining the manner in which annual bonuses of the company should be distributed. In words of Edmans, Gabaix and Jenter, (2017 if in a case an employee makes an optimum effort and has a positive effect on the productivity of company than same he should be provided with the compensation rightfully.
Further, in case if the employee believes that system is fair than the same will develop a positive environment in the organization and will boost up the morale of employees. The government has the very important function of controlling executive compensation through regulatory authorities for various types of companies (Newton, 2015).
The perks and bonus slab are developed in accordance with provision set by the government. Further, if the government makes it mandatory to provide the basis of performance slab measurement than employees could be assured that equal behaviour has been done with all the employees and same will motivate them to focus on their work. It is because; the norms and regulations relating to compensation of chief executives are formed after considering the provisions provided by the government relating to the executive compensation. In case government provides details regarding the base in accordance with which compensation is being decided than employees will be able to assess whether they are treated fairly or not.
Motivational strategies for employees
In order to motivate employees incentive plans are the best method for making an attempt to attain into the maximum level, but there is one problem under this that they are generally not flexible. Many incentive plans include pay-for-performance in which staff of the company is rewarded for the accomplishment of the particular objects. These are the types of executive compensation strategies which are likely of medium-range duration and contain performance criteria that characterise broad operational or financial metrics. Limitations of this strategy are that it involves various significant events which occurs irregular timeframe before standard cycle; the impact of employees on plan criteria might be narrow or focused on uncontrollable factors. So these all are the reasons for which employers must think about other compensation strategies in order to provide appropriate compensation to optimum performers (Obermann and Velte, 2018.). When an employer wants to meet the outcome, these contracts are helpful, i.e., it helps in achieving both tangible and which has considerable monetary value to the organization. The payout is made restricted on generating the particular result of the work or through which employees are not bounded by the drawbacks of incentive plans.
By considering above described literature it can be concluded that there is significant impact of equity theory on executive compensation. Further incentives strategies must be based on performance of employees to keep them motivated and to ensure fairness in work environment.
De Vaan, M., Elbers, B. and DiPrete, T.A., 2018. Obscured Transparency? Compensation Benchmarking and the Biasing of Executive Pay.
Edmans, A., Gabaix, X. and Jenter, D., 2017. Executive compensation: A survey of theory and evidence (No. w23596). National Bureau of Economic Research management.
Guay, W.R., Kepler, J. and Tsui, D., 2017. The Role of Executive Cash Bonuses in Providing Individual and Team Incentives management.
Newton, A.N., 2015. Executive compensation, organizational performance, and governance quality in the absence of owners. Journal of Corporate Finance, 30, Pp.195-222.
Obermann, J. and Velte, P., 2018. Determinants and consequences of executive compensation-related shareholder activism and say-on-pay votes: A literature review and research agenda. Journal of Accounting Literature, 40, Pp.116-151 management .
Pepper, A. and Gore, J., 2015. Behavioural agency theory: New foundations for theorizing about executive compensation. Journal of management, 41(4),Pp.1045-1068.
Rau, R., 2017. Executive Compensation. Foundations and Trends® in Finance, 10(3-4), Pp.181-362.