Performance Management and Executive Compensation Essay

IntroductionIn the history of neo economies, from the late 1800s to today businesses have faced good challenges regarding compensation for executives and its congenator to line death penalty. In response to major economic crises during the 20th century, the united States enacted broad-establish command measures as attempts to anticipate what were seen as honourable challenges and agency contradicts surround both performance management and executive compensation.To understand the current issues go about businesses and regulators, it is important to look at three of most significant legislative acts Congress has passed. The Securities alternate figure outs of 1933 and 1934, as well as the SarbanesOxley present of cc2 bet legislative interventions regarding corporate pecuniary accounting toward the goal of curtailing the honourable challenges and the conflict of agency problems that can chuck out from performance management and executive compensation. b arly so far a fter these laws were enacted, ethical conflicts can and still do arise when it comes to the compensation for employers and executives.Securities Act of 1933The Securities Act of 1933 was born in response to the contrast market crash of 1929. Just as it was then, companies who issue securities to raise currency for funding impudently enthronisations or to expand operations have an internal incentive to present their phoner and its plans in the rosiest light possible to investors (Sarkar, 2013).The Securities Act of 1933 serves the dual purpose of ensuring that issuers of securities to the public disclose material information to investors as well as ensuring that any securities transactions are not based on fraudulent information or practices (Sarkar, 2013). The Securities Act of 1933 affects public disclosures by dint of a mandatory registration process for sellers and brokers and applies to the sale or mint of any regulated security type (Sarkar, 2013).Securities Act of 1934 (a.k.a. the give-and-take Act)The Exchange Act primarily regulates transactions of securities that vex place after its initial walking by a company (Sarkar, 2013). These transactions much take place between parties other than the issuer, such as through trades that retail investors execute via brokerage firms (Sarkar, 2013). The biggest instal of The Exchange Act was the creation of the Securities and Exchange Commission ( secondment), a federal agency responsible for regulating the securities markets (Sarkar, 2013). Since 1934, the SEC has taken on the role of mitigating fraud, abuse, and other ethical issues in the monetary reporting of publicly traded entities.Sarbanes-Oxley Act of 2002The Sarbanes-Oxley (SOX) Act of 2002 was the most significant legislation passed since the 1930s and came in the aftermath of the corporate scandals at companies such as Enron, WorldCom, and Arthur Andersen (Amadeo, 2013). Sarbanes-Oxley created the Public Company Accounting Oversight Board (PCAOB), a new organization whose purpose is to help oersee the accounting industry (Amadeo, 2013). To prevent the sort of conflicts of interest that had led to the Enron fraud, SOX established new prohibitions for auditors when engaging in consultation doing for their auditing clients. It also banned company loans to executives and gave increased job protections to whistleblowers (Amadeo, 2013).Performance Management and Executive CompensationEven after the transient of the Securities and Exchanges Acts of 1933 and 1934 and the Sarbanes-Oxley Act of 2002, there are reasons to be concerned about ethical violations in financial accounting. Two areas where there still exist possibilities for unethical activity which could harm the supply of reliable information to investors are the performance management within a company and the compensation sheafs of executives. menstruum estimable ChallengesWhen evaluating situations to support ethical decision-making, one must first identify t he ethical problems as they arise (Eldenburg, 2005). Performance measurements are most often measurable in terms of time or financial figures how long or how much. When selecting a new CEO, the board of directors is required to offer a financial package that is both remunerative enough to attract the most suitable individual and yet also appears fair to other ranking executives of the company. such financial packages need to be ap turn up by the major shareholders when the net income will impact the companys financial reports. During an economic recession, firms may significantly downsize their workforce as well as benefits and labor rate employees receive, yet often find themselves contractually obligated to hand-out large motivatores and increase salaries for their executives.This is potentially a major ethical issue for a company and its executives, with the fibers of the company being reduced while executives are earning more(prenominal) and more even though the firm i s struggling. CEOs at the countrys 200 largest companies earned an average of 20 percent more decease form than in 2009, according to recent corporate filings. By comparison, average pay back for workers in the private sector rose just 2.1 percent last stratumnearly the smallest increase in decades (Harkinson, 2011).It is also not inaudible of for CEOs to be forced to step down while still receiving their lucrative compensation packages only to also be given a benevolent golden parachute as they leave. Excesses like this can have detrimental effects on employee morale as the majority of the company often consists of those earning the least. Boards of directors should take into consideration the financial standing of the firm before they offer an over-the-top compensation package to a CEO.As an illustration of the contrary, Steve Jobs volunteered to work at Apple for a salary of only $1 per year A regulatory filing shows Apple CEO Steve Jobs compensation package remained the u sual $1 in fiscal 2010 as is customary, Jobs got no bonus or perk (Steve Jobs, n.d.). In terms of ethical challenges and executive compensation, Jobs proved by his example that it is possible to put the company first even if that meant earning a salary of $1. CEOs do not often have to dissolve for such low salaries to show leadership and camaraderie however, accepting little exorbitant amounts can help avoid accusations of greed and impropriety altogether.Current Agency IssuesPrincipals hire factors to make decisions for them and to act in their behalf (Eldenburg, & Wolcott, 2005, pp. 591). Often, meanss may go on to hire instruments of their own, delegating authority and establishing sub-units known as debt instrument centers which can decentralize decision-making and accountability. A particularly special case of the lead-agent human kin involves the executives of companies who are effectively agents of the shareholders selected to run the company. Four common types of indebtedness centers are cost centers, revenue centers, profit centers, and investment centers. (Eldenburg & Wolcott, 2005, pp. 595)Those agents who possess decision-making authority over a responsibility center use demographic financial entropy provided by the accountants for budgets and reviews of sales, profits/ dischargees, value appraisals, and costs. Accountant and audit provided information is employ to evaluate and measure performance, monitor the military posture of managers, reward performance, and influence decisions. (Eldenburg & Wolcot, 2005) The audit information accountants prepare and present is vital to the principal/agent relationship and performance measurement, but also has its costs. The primary challenge presented by the principal/agent relationship concerns the high level of pressure to perform that an agent can experience in the form of the agents compensation.Money, as well as other forms of compensation such as bonuses and farm animal options, increased authority, and ownership expectations are direct motivators of challenges to the ethical foundation of agent performance. When principals evaluate the performance of agents, their decisions are likely to be based on the same accounting information their agents also used. This common use provides a potential incentive for an agent to alter, falsify, or otherwise misrepresent definite data that principals receive.As decision-making authority is granted from a principle to an agent, the agents performance is evaluated to some degree from each authority level. Evaluating the effectiveness of the decisions made in each agency level or responsibility center is the core of measuring, monitoring, and motivating performance. Poor performance leads to a loss of decision-making authority, responsibilities, compensation, and other benefits within the entire principal-agent structure. Conversely, outstanding performance has the opposite effect and benefits everyone up the principal-agent ladde r.ConclusionThe Securities Exchange Acts of 1933 and 1934 are essential because of their transparency as spelled out in their objectives, and for providing prospective investors detailed information about investment decisions. Their main purpose was to protect shareholders from misrepresentation and scam in the sell of security. The Acts mandated that securities sold to the public within the United States of America must be listed with the Securities and Exchange Commission.Later, the Sarbanes-Oxley Act of 2002 (SOX) was established to make sure that CFOs and CEOs authenticate and honor the financial reporting of their companies. Despite these monumental pieces of regulation, which resulted in the creation of devil separate oversight agencies, there are still situations susceptible to ethical challenges and agency issues particularly concerning performance management and executive compensation.ReferencesAmadeo, K 2013. Sarbanes-Oxley Act of 2002. Retrieved from http//useconomy.ab out.com/od/themarkets/p/sarbanes-oxley.htmEldenburg, L. & Wolcott, S. (2005). Cost management Measuring, monitoring, and motivating performance, (1st ed). Hoboken, NJ buns Wiley & Sons.Harkinson, J. (2011). Americas 10 Most Overpaid CEOs. Retrieved from http//www.motherjones.com/politics/2011/04/10-most-ridiculously-overpaid-ceosMcConnell, C., & Brue, S. (2005). Economics principles, problems and policies (16th ed.). newfangled York McGraw-Hill.Sarkar, D 2013. Securities Act. Retrieved from http//www.law.cornell.edu/wex/securities_act_of_1933Steve Jobs again earned $1 for work. (n.d.). Retrieved from http//www.timesleader.com/stories/Steve-Jobs-again-earned-1-for-work-at-A,115771