Applied Research Problems In Financial Accounting

PART A 

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:

1. Provide an outline of agency theory and its assumptions and its 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.) 8 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.) 8 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: 
4. Is a standard approach to all executive compensation appropriate or  should the individual differences of executives be considered?  b. If you believe individual differences of executives need to be taken into  account, what are some individual characteristics that should be  considered and what impact might these characteristics have on  structuring individual executive compensation? Link these differences,  where applicable to the details provided about the Sunnyside's  executives. (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) 20 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.) 10 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

General format and presentation criteria 

7. Providing a professional presentation (e.g., proof-reading and using the  appropriate format, referencing and presentation). 6 marks  

PART B 

Use the two papers about the audit expectation gap, set in two culturally  different countries (these will be available on the study desk on June 1, 2015).  

Compare and contrast (what are the commonalities and differences) between  the two papers with relation to the following issues: 

1. Briefly outline the research approached used by each paper. 2 marks 
2. What were the research aims of each paper? 5 marks 
3. How appropriate were the research approaches in addressing the aims of  the two studies? 3 marks
4. Comment on the selection of participants and the extent to which the  choice of such participants is appropriate to answer the research questions  posed by each paper.  5 marks 
5. The findings of each paper. 5 marks 
6. What impact might the location of the study for each paper have on the  findings? 5 marks 
7. Comment on the rigour of the studies. What has been done in each paper  to ensure the findings are valid? 5 marks

Part A

This report is focusing on the issues relating to designing of executive compensation under an agency theory. This report provides recommendations for the most suitable approach to the board. Visibly there are certain issues as were raised at the board meeting. These issues are: 

1. How much is this relevant to provide equal compensations for each executive with different personalities and working styles?
2. Why there is a large difference between the compensations of CEO and other executives?
3. Hiring a relative as compensation consultant will add any value to the firm by designing an appropriate compensation plan?

The compensation plan has to be designed for the top line executives such as CEO, CIO etc. with varying experiences, age and job responsibilities. The report primarily focuses upon the executive compensation design as directed by the agency theory, assumptions of the theory as followed designing compensations and ongoing research challenging the assumptions. 

Executive compensation design: An analysis

1. The theory behind Executive compensation- 

In corporate finance and governance, literature agency theory addresses the conflict of interest for different parties having a claim on assets. There are principals (debt holders and equity holders) as well as agents (executives). The conflict of interest can either between principals (large shareholders and small shareholders or equity holders and debt holders) or between principal and agents.  Agency theory deals with the goal alignment of different principal to avoid the conflict of interest (agency problem). Agency theory also deals with the risk-bearing issues of principal and agents after designing the compensation for the agents. 

To reduce the conflict of interest between principal and agents, the executive compensation is designed in such a way so that the agent's objective function is aligned with the principal's goal an agent works for the firm by avoiding the self-interest actions. One most prevailed way is to provide ESOP (employee stock options) to its executives.