Performance Management and Executive Compensation Essay

IntroductionIn the history of modern economies, from the late 1800s to straight off businesses have faced honourable challenges regarding earnings for executives and its relation to job surgical operation. In response to major economic crises during the 20th century, the United States enacted broad- found legislation measures as attempts to prevent what were seen as ethical challenges and agency conflicts surrounding both(prenominal) practiseance management and executive compensation.To understand the current issues facing businesses and regulators, it is important to facet at three of most signifi dirty dogt legislative acts Congress has passed. The Securities change all over mos of 1933 and 1934, as well as the SarbanesOxley Act of 2002 re perplex legislative interventions regarding incarnate monetary accounting toward the goal of curtailing the ethical challenges and the conflict of agency problems that fanny originate from performance management and executive compens ation. Yet even subsequently these laws were enacted, ethical conflicts stinker 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 stock market skirmish of 1929. Just as it was then, companies who issue securities to raise money for funding clean investments or to expand operations have an inherent incentive to present their company and its plans in the rosiest light possible to investors (Sarkar, 2013).The Securities Act of 1933 serves the dual usage of ensuring that issuers of securities to the public disclose material information to investors as well as ensuring that any securities transactions atomic number 18 not based on double-dealing information or practices (Sarkar, 2013). The Securities Act of 1933 affects public disclosures through a man informationry registration process for sellers and brokers and applies to the sale or trade of any modulate security type (Sarkar, 2013).Securities Act of 1934 (a.k.a. the Exchange Act)The Exchange Act generally regulates transactions of securities that take place after its initial offering by a company (Sarkar, 2013). These transactions very much take place amidst parties other than the issuer, such as through trades that retail investors execute via brokerage firms (Sarkar, 2013). The biggest effect of The Exchange Act was the presentation of the Securities and Exchange Commission (SEC), a federal agency responsible for regulating the securities markets (Sarkar, 2013). Since 1934, the SEC has taken on the role of mitigating fraud, ab work, and other ethical issues in the financial reporting of publically 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 Pub lic fel conf utiliseship Accounting Oversight Board (PCAOB), a naked as a jaybird organization whose mark is to help oversee the accounting industry (Amadeo, 2013). To prevent the sort of conflicts of entertain that had led to the Enron fraud, SOX established new prohibitions for auditors when engaging in consultation course for their auditing clients. It also banned company loans to executives and gave increased job protections to whistleblowers (Amadeo, 2013).Performance steering and Executive CompensationEven after the passing of the Securities and Exchanges Acts of 1933 and 1934 and the Sarbanes-Oxley Act of 2002, at that place are reasons to be concerned slightly ethical violations in financial accounting. Two areas where there still exist possibilities for unethical activity which could misuse the supply of reliable information to investors are the performance management indoors a company and the compensation packages of executives.Current Ethical ChallengesWhen eval uating situations to support ethical decision-making, one must(prenominal) first identify the ethical problems as they arise (Eldenburg, 2005). Performance measurements are most often measured in call 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 lucrative enough to attract the most qualified individual and moreover also appears fair to other ranking executives of the company. Such financial packages pack to be approved by the major shareholders when the payment will extend to the companys financial reports. During an economic recession, firms may significantly downsize their custody as well as benefits and labor rates employees receive, yet often find themselves contractually obligated to hand-out large bonuses and increasing salaries for their executives.This is potentially a major ethical issue for a company and its executives, with the fibers of the company macroc osm reduced while executives are earning more and more even though the firm is struggling. CEOs at the countrys 200 largest companies earn an ordinary of 20 percent more last year than in 2009, match to recent corporate filings. By comparison, average pay for workers in the buck private sector rose just 2.1 percent last year close the smallest increase in decades (Harkinson, 2011).It is also not unheard of for CEOs to be forced to step down while still receiving their lucrative compensation packages provided to also be given a generous golden climb up 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 thoughtfulness 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 orchard apple tree for a salary of only $1 per year A regulative filing shows Apple CEO Steve Jobs compensation package remained the usual $1 in fiscal 2010 as is customary, Jobs got no bonus or permeate (Steve Jobs, n.d.). In terms of ethical challenges and executive compensation, Jobs proved by his casing that it is possible to put the company first even if that meant earning a salary of $1. CEOs do not often have to settle for such low salaries to show leadership and camaraderie however, accepting less exorbitant amounts can help avoid accusations of greed and impropriety altogether.Current Agency IssuesPrincipals strike actors to make decisions for them and to act in their behalf (Eldenburg, & vitamin A Wolcott, 2005, pp. 591). Often, agents may go on to hire agents of their own, delegating ascendence and establishing sub-units known as responsibility centers which can decentralize decision-making and accountability. A particularly special case of the principal-agent relationship involves the executives of companies who are effectively agents of the shareholders selected to run the company. Four common types of responsibility centers are address 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 data provided by the accountants for budgets and reviews of sales, profits/losses, value appraisals, and costs. Accountant and audit provided information is used to evaluate and measure performance, monitor the effectiveness 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 wel l as other forms of compensation such as bonuses and stock options, increased authority, and ownership expectations are direct motivators of challenges to the ethical behind 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 pull wires certain data that principals receive.As decision-making authority is granted from a precept 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 actuate 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 pivotal effect and benefits everyone up the principal-agent ladder.ConclusionThe Securities Exchange Acts of 1933 and 1934 are essential because of their enhancer 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 selling 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 approve the financial reporting of their companies. Despite these monumental pieces of regulation, which resulted in the creation of two separate oversight agencies, there are still situations supersensitised 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.about.com/od/themarkets/p/sarbanes-oxley.htmEldenburg, L. & Wolcott, S. (2005). Cost management Measuring, monitoring, and motivating performance, (1st ed). Hoboken, NJ John Wiley & Sons.Harkinson, J. (2011). Americas 10 approximately 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.). New 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