Discuss The Risks Associated With Linking Executive Remuneration Solely To Financial Data

Introduction

The most important relationship in a firm is between the owner and employees. According to the literature on corporate governance, it has focused on the best way to constrict the opportunistic behavior of administrators that isn’t to proprietors’ greatest advantage. Executive remuneration is a conceivably strong gadget by which to lessen administrative astute conduct. Analysis of executive remuneration, in any case, has, to a great extent, focused on the senior executives of expansive open restricted companies. In spite of the fact that many researchers examine the compensation execution relationship in common companies, there is still a huge amount of research that can be done on publicly listed companies or governmental companies that have not yet gone through such situations (Adams et al., 2012).

Unlike public limited companies, mutual companies do not have tradable property rights, so they face weaker market controls and, therefore, many times, they are not controlled by the outer forces. Other corporate governance devices, therefore, take on an additional vital role in attenuating managerial opportunistic behavior. The Board of Directors, for instance, plays a vital role in monitoring the behavior of senior executives, and many times, the remunerations for the executives are based on the evaluation of executives by the board of directors.

It’s also important that members should be remunerated in the simplest way so as to serve owners’ interests by observing senior executives for their extraordinary performances. Clearly, non-executive directors have a crucial role to play in this respect, and a vital issue relates to the remuneration and incentive structures offered to non-executive administrators (such as the Chair of the Board of mutual savings and loans, for example) as opposed to executive directors. This issue is probably going to be even more important in mutual building societies, however, because it is not clear that members’ (owners’) interests are best served by an attribute of profit maximization (Aureli et al., 2012).

Canyon et al. (1998) explain that there are three measures of executive remuneration, and it also aids in the removal of serial correlation. Relative productivity is incorporated as an important variable since it catches the idea that chiefs might be paid for past great execution, and it is less inclined to indigeneity issues (Conyon et al., 2000). Relative execution is just acknowledged to pay-setters after all firms’ gainfulness is freely accessible. In this manner, there might be a slack in regard to the effect of relative execution on executive remuneration. Both of these remuneration packages or techniques may differ from each other and have different impacts on each other, but the way both are used depends on the organization or organizational policy.

Critical Analysis

In this given article Elon Musk explains the new pay deals very clearly throughout this article. For the last many years, people have been assuming about Elon Musk’s future at Tesla, whether he will be successful next year or if he will step down in the next two years. He is known for his ambitious bets, but the Tesla CEO was now gambling with his own net worth, which means it can be assumed that for the next 10 years, he will get nothing in the form of pay or salary. Along with this, no bonus will be given and also electric car because the company may able to double its value.

According to one analysis, executive compensation is given in different forms, for example, salary and bonus or even the little packages by the company. Other stock options and pensions, including share plans, are considered debatable because many may consider them as a part of the parcel, but some may not think of them as important. These are considered debatable because these factors are helpful for the company to attract employees, and especially talented and skilled employees demand these advantages. These factors, such as retirement benefits, pension and others, also grasp the attention of media or academics. The experts’ criticism is in different forms. For example, they criticize the pay level and organization systems regarding the pay levels.

It twisted the prominent research paradigm in the corporate governance zone because of the variety of different criteria. In corporate companies or governmental agencies, there are different pay levels and different remuneration packages for the executives, which are suggested according to different circumstances. Different compensation bundles from the top administrators are attracting the attention of many executives and creating a powerful impact on the global level. It is motivating for those who are disappointed because of disapproval about expensive and attractive rewards as they can be sure of getting good rewards in the future (Conyon et al., 2000).

The article Musk clarifies the significance of remuneration offered by Tesla because Musk became an extremely rich person who has filled in as Tesla’s executive since 2004 and as its CEO since 2008. Musk has been getting along fine and dandy in spite of never accepting pay as long as he has been with the organization. In fact, Musk, worth an expected $21.5 billion, will indeed deny his yearly paycheck of $56,000, the lowest pay permitted by law for an 80-hour week’s worth of work in Palo Alto, Calif., where Tesla was situated in 2018 and the decade from there on. This explanation relates to how an inexpensive and good quality firm has the ability to deal with organizational issues, and most probably, the existing top management of the organization took steps about these issues (Faulconbridge et al., 2009).

In 1999, different companies gave options to their top management, and 82 percent compared the executive compensations. They concluded that the compensation in benefits of top management and executives are strongly helpful in reducing expenses. On the other hand, it is also assumed that this factor can negatively affect the performance and interest of executives. The rewards, benefits and different remuneration packages are strong factors to increase the performance of employees, including executives. Different research has been conducted on this issue, and most of the studies suggested that good salary packages and extra benefits are crucial factors in attracting skilled and talented people to organizations. These talented and skilled people can contribute to organizational operations and are able to increase organizational performance. Most people consider that the extra pay and benefits are not expenses. In fact, it is an investment in the organization to increase employee performance. That’s why it is important to use fair means for salary and other benefits (Frydman et al., 2010).

After introducing the new payment plan, Musk could actually become much, much richer, and so could Tesla’s stockholders. To earn any compensation that can be brought forward, Musk must develop Tesla, whose present market capitalization is about $59 billion, to $100 billion in showcase top. Furthermore, the increment in its income or balanced profit (before premium, assessments, deterioration and amortization) is no less than 70%. That would fulfill the main point of reference of the 12-level remuneration stepping stool, enabling Musk to gather investment opportunities worth an extra $1 billion (Gerhart et al., 2014).

However, Musk also has the opportunity to collect a significantly bigger windfall on the off chance that Tesla’s reasonable worth scopes $650 billion by 2028. And if the other money-related measures increase in the vicinity of 15 and 21 times, Musk can keep every one of the dozen tranches of investment opportunities, netting him an extra $55.8 billion, as indicated by the organization.

Musk’s genuine reward would be significantly more noteworthy. All things considered, the CEO is likewise Tesla’s biggest investor, and in the event that he hits every one of the 12 execution breakthroughs. The organization figures Musk would claim as much as 28.3% of Tesla. With that extensive intake of a $650 billion organization, Musk’s total assets would surge to $184 billion in Tesla stock alone, possibly making him the wealthiest individual on the planet (Thornton et al., 2012). Other literature, was conducted and studied for understanding remuneration revealed that these approaches of remuneration are attractive for the executives and have a positive impact on the organizations. But on the other hand, these are very costly for the organization because organizations pay a lot for these services. According to estimates, the expenses of remuneration are almost equal to paid taxes (Bender, 2004).

Zajac and Westphal (2004) have proposed theories of logic relating to the relationship between logic and the salary plans that are offered to employees. These theories show the different dimensions of the relationship between what are the rules regarding remuneration and what is actually happening. Corporate success lies within the fact that official employees are experts whereas the other employees basically work as consultants, and both of them are willing to act to the greatest advantage of investors, though expect that administrators are self-intrigued specialists and non-official chiefs go about as limitation on the shrewd conduct of administrators, utilizing observing and motivating force systems to guarantee that officials demonstration to the greatest advantage of investors.

Rules and regulations regarding remuneration packages have diversity in them, they are made keeping in mind the best interest of the executives and help the organizations in understanding how pay packages should be made. These rules and principles are not strict, but actually, they are totally explained and easy to change according to the situations of the organizations.

This is a broad, yet not a comprehensive rundown; future research and level-headed discussion among scholastics, specialists, financial specialists, and controllers, and it is quite necessary to be sure whether the definitions made about remuneration are accurate or not. They are also responsible for maintaining the rules and regulations and following the principles related to remuneration. For example, these rules provide guidelines on whether the remuneration being provided to any executive is compatible or not. The change in principles regarding these issues requires a board or the council to settle down on numerous choices that may differ crosswise over associations, ventures, nations, eras, and so forth (Kostiander et al., 2012).

Although the logic and the principles regarding the remuneration packages are quite clear but still how much they are applied in organizations or how much they are being followed is totally unclear. It is totally clear that earlier investigations have concentrated on official remuneration when all is said in done terms, not particular choices that remuneration boards of trustees made. The uncommon exemptions are

Bender (2007) investigated the uncommon exemptions and inferred the reasons why 12 principles regarding remuneration have been rolled out. In settling on and revealing choices, the remuneration panel should organize the remuneration principles in some way in light of the fact that not all principles can be at the same time. Future research ought to analyze how various logic, the shifting convictions of chiefs, officials, and so forth influence the prioritization and emblematic utilization of the principles (Lan et al., 2010).

Conclusion

In this paper, there are three ideas that explain the whole story, and these three ideas have been generated from the principles made about remuneration, the remuneration practices and the processes that are being followed by the governmental companies. Remuneration advisory groups utilize the essence made through remuneration rules and bundles for administrators and to assess their execution, so officials act to the greatest advantage of investors. This helpful approach is tempered and it means that not all non-official chiefs trust that money related impetuses propel administrators, they expect to pay officials equivalently to their companions. The main theme behind the remuneration process and the way it is being used is undoubtedly made through the diffusion of expert systems. The principles or mechanisms through which the remuneration packages are made are controlled by the trustees and board of directors, which also helps the executives by shielding their remuneration packages from the impact of investors, the mass media and the controllers. Although much of the research has been done in this regard till today no proper method of remuneration has been devised. The level of executives differs in every organization, and the levels of organizations are quite different, too; one method that may be suitable for one company may not be suitable for the other. Much research on this topic needs to be done in the future to make packages that may be suitable for most organizations.

Question 2: Using your knowledge of balanced scorecards and organizational performance, address the following:

Discuss the risks associated with linking executive remuneration solely to financial data.

There are a number of risks associated with linking executive remuneration solely to financial data. Most of the risks are as follows:

• Incentives can be disintegrated, and when it will be low, they can cause low employee engagement.
• If the remuneration is solely related to financial data, it can cause accounting issues and fraud in the organization.
• If the company’s performance and profit are quite high, it would not be possible to pay high incentives and rewards to the executives.
• If a company pays according to performance so, because of this process, lower-level employees can be ignored by the company.
• Risk because of hierarchical culture creates a great deal of consideration and open deliberation.
• Employees are required to make a yearly announcement of consistency with this prerequisite.
• This process of remuneration can create conflicts among top-level management.
• This process has a strong potential to negatively impact the organizational culture.
• The Group arrangement isn’t to grant any optional annuity benefits.
• The private organizations can pay well remuneration as compared to governmental so this process can create problems for governmental organizations.

The organizing of compensation and advantages in business contracts can show the two openings and dangers for associations. Not any single procedure is best in all situations so it depends upon the situation that which remuneration method can work best in which organization.

Discuss how management could use a balanced scorecard to overcome these risks.

There are plenty of risks that are associated with the risk pf using only financial data for making or linking it with the executive remuneration package. The balanced scorecard was prepared by Robert Kaplan who was a Harvard University professor, and David Norton. They started their research in 1990 in several companies, and they aimed they find some new methods of performance measurement. Generally, enterprises had been depending primarily on monetary measures to show execution. Numerous reactions emerged about utilizing just budgetary measures to track association execution (Landry et al., 2002). However, due to the efforts of Kaplan and Norton, a balanced scorecard has been made, which can be used by organizations easily for measuring the performance of the organization or for understanding the impact of risks that can be raised in organizations due to the use of financial data for executive remuneration. Balanced scorecards give organizations an opportunity to use different measures to understand whether the organization is working successfully or needs some changes (Marin, 2017).

The balanced score card can be used by the organizations as they can assign some specific numbers with some specific risks to understand the impact of those risks on the organizations. The balanced scorecard gives the organization a chance to mitigate the risk before it actually causes a loss for the organization. In case of risks arising due to the use of a balanced scorecard, the organization can get ready and make employees ready to face the challenges that are coming their way in the near future. It helps the organization to be prepared for the loss before it actually happens (Mark et al., 2006). Money related measures regularly include data from all levels condensed in abnormal state budgetary explanations. Information displayed in such a way may not be extremely helpful in light of the fact that regularly they don’t achieve every one of the levels of the association and its representatives.

Question 2:

1):

Sale = Total Fixed Cost + Targeted Income / Contribution

75000 = 687500+1000000/0.45

= $3750000

Answer cross-checked:

2):

3):

4):

5):

Payback Formula:

Investment required/ Net annual cash flows

6):

7):

i):

The accountant did not follow the proper discounted cash flow techniques to evaluate the project. He apportioned overhauling cost over the project life span rather than accounting for it in the relevant years and then discounting it. Through which he wrongly calculated the return of the project over the period.

ii):

iii):

Internal Rate of Return:

Lower rate +NPV at lower rate/NPV at lower rate-NPV at higher rate *(higher rate-Lower rate)

IRR = 12%

This is lower than the company’s desired rate of return, which is 15%

8):

i)

ii)

iii)

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