Week 9 - reward systems Flashcards
Define agency and stewardship theory
Agency theory – assumes a contractual relationship between principle and agent where both are driven by self interest.
Stewardship – assumes that employees are not only driven by self interest, but motivated also by the goals of the organisation
List the main issues within agency theory
Principles within agency theory:
• Self interest – agent/principle act on self interest
• Adverse selection – principle cannot truly know agent, bears a risk of picking incorrectly
• Moral hazard – owner bears the risk of agent shirking duties
• Signalling – agency theory can predict opportunity cost within a situation
• Asymmetrical info – within the contractual relationship
Stewardship assumes an element of intrinsic motivation. Define intrinsic & extrinsic motivation & the relationship between motivation & performance.
Intrinsic - internal rewards, eg awards, satisfaction, challenge.
Extrinsic - external rewards, eg cash or equity for achieving certain goals.
A recipricol relationship exists between motivation and performance. A move in one produces a corresponding move in the other.
Rewards must be valued & measurable to be useful. List possible problems with reward programmes.
- Issues of agency
- Individual vs team rewards
- Measurement
- Locus of control
- Extrinsic diminishing intrinsic rewards
Agency costs arise when agents fail to act in the interests of principles. List some manifestations of agency theory.
- Poor decisions
- Incongruent goals
- Monitoroing costs
- Goal alignment costs
- Contracting costs
Key components of reward systems are fixed salaries and variable components (equity) based on pre defined objectives. Discuss key considerations.
Some discussion over the ability of extrinsic rewards to influence long term performance.
- Who incentives apply to
- Performance measured at the individual, divisional/unit and/or corporate level
- Specific measures will be used
- Proportion of total rewards on short-term versus long-term performance?
Incentives can take the form of cash or bonuses or equity (shares / share options). List the merits of both.
cash:
• might be preferred by a risk-averse executive or manager
• do not dilute the company’s equity holdings
• reduce the overall cash available
• usually short term
Equity payment
• a longer-term
• may help better align principle and agent goals
• no cash outflow
• dilution of shareholder value
• temptation for managers to engage in accounting misstatement
Compensations often a mix of salary and bonuses. Discuss the way it’s used and various aspects in it’s consideration.
Attempts to align the interests of principles and agents. 4 aspects:
- How to measure
- Time period of the mechanism
- Targets required
- Type of incentives
List emerging issues in the area of rewards.
- Relative performance evaluation (RPE) - the comparison of company performance, using suitable measures, against the performance of a peer group
- Pay-for-performance issues relate to whether sufficient benefits (such as improved organisational performance) are derived from linking executive pay to executive performance.
• Regulation and government intervention
o Disclosure
o Perceptions of equity
Risk amplifies returns so cannot be eliminated but can be managed. Define an integrated approach to managing risk.
An integrated approach to risk management considers compliance rules, external disclosure requirements and the auditability of their internal management control processes in a balance approach to managing risk.
Identify factors that contribute to risk exposure.
The risk exposure for organisations increases when poor structural and system safeguards are mixed with a lack of employee proficiency or a lack of understanding of company codes of conduct and desired behaviour.
List day to day risk managment principles
Day to day risk management principles
• Risk oversight or the implementation and continual review
• Risk management system
• Regular monitoring and reporting of a risk profile for eve
o Strategic
o Financial
o regulatory
