Those days are likely over, for a variety of reasons, including shareholder concerns about the ever increasing dilution due to the issuance of options and new accounting rules requiring companies to expense options… In addition, studies have shown that the accounting cost of stock options exceeds employees’ perceived value of those options. Finally, there has been a crisis in governance that has caused a reexamination of corporate accounting standards. No wonder some feel that stock options are dead in the water.”
Compensation committees are now facing serious challenges. It is the job of the committee to have a valid, sound and sensible pay philosophy in order to determine compensation that best suits the company policy and shareholders interests: “…compensation committees must decide how to use a company’s pay philosophy to best advance its overall business principles and goals.”
Stakeholders are now expecting compensation to be closely tied with performance because it is felt that massive perks and salaries have a negative impact on company’s profitability. Executives themselves are however against any such alignment since it spells risk and increased responsibility. If pay is aligned with performance as stakeholders expect, CEOs can expect variations in pay and to avoid such risks they are against performance-based pay system. It is widely believed that compensation committees do take into account performance indicators when determining compensation packages. Firms have been using performance measures regularly to create more sensible compensation system. These indicators include “stock return,” “accounting income” and “cash flows from operations.”
It is believed that employers must now find a more cost-effective way to keep the executives motivated and to enhance and improve their performance potential. Some researchers believe that one of these cost-effective measures can include “using a portfolio of stock incentives, including restricted stock units, performance share units and stock purchase plans, in addition to stock options.” They feel that such measures can reduce accounting expenses while at the same time the compensation package so developed would have approval of other employees and shareholders.
Compensation committees are now increasingly depending on the expertise of CPAs in designing suitable compensation packages. They can help committees establish performance milestones for executives, upon achievement of which their compensation would increase. Benefits and bonuses must be increased in accordance with performance and achievement. For example CPAs can advise the compensation committee on which performance goals to establish and if these goals are feasible in the long run.
Some researchers have come up with a set of practices that CPAs can adopt to design relevant and accurate compensation packages for executives and feasible performance goals. By feasible we refer to goals that would help the firm attain some real economic growth instead of quick short-term benefits. Some of these practices are summarized below:
Use correct performance goals. These goals should reflect long-term achievement instead of short-term growth
If there is a specific formula which is followed to calculate executive compensation then have independent auditors double-check the calculations.
A system of accurate financial reporting must be adhered to.
With this accurate financial reporting, executives must expect reduction and deduction in their bonuses if targets are not met or goals are not achieved in given time frame.
Compensation must be aligned with overall performance of the firm and the role played by the executive in it.
Young Baek, Jose a. Pagan. Executive Compensation and Corporate Production Efficiency: A Stochastic Frontier Approach. Contributors: Quarterly Journal of Business and Economics. Volume: 41. 2002. 27+.
Use Best Practices in Executive Compensation Plans. Journal of Accountancy. Volume: 193. Issue: 6. 2002. 22.
Shamsud D. Chowdhury, Eric Wang. CEO compensation: Turning conventional wisdom on its head (almost Ivey Business Journal Online London: Nov/Dec 2004. p. D1
Randy Myers. Why compensation committees need your help Journal of Accountancy New York: Dec 2002. Vol. 194, Iss.6, p. 65-71 (7 pp.)
Paul Hodgson. Poor disclosure and elitism: The problems with executive benefits Ivey Business Journal Online London: Sep/Oct 2004. p. E1
Ray Murrill, Mike Caputo. Making executive pay work. Ivey Business Journal Online London:May/Jun 2004.
Mark Van Clieaf. Are boards and CEOs accountable for the right level of work? Ivey Business Journal Online London May/Jun 2004. p. 1
Shamsud D. Chowdhury, Eric Wang.
Shamsud D. Chowdhury, Eric Wang…