wk 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
S AMS
Principles within agency theory:
• Self interest – agent/principle act on self interest
Asymmetrical info
• 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
Stewardship assumes an element of intrinsic motivation.
A reciprocal relationship exists between motivation and performance. A move in one produces a corresponding move in the other. Define intrinsic and extrinsic motivation, pros and cons of both.
Intrinsic - internal rewards largely based on satisfaction, eg awards, recognition, challenge.
Pros - long term
self sustaining
focuses on the activity not the reward
Cons - slow
requires active management
not 1 size fits all
Extrinsic - external rewards, eg cash or equity for achieving certain goals.
Pros
quick
little effort,
works for difficult activities
Cons
distracts from activity
loses effectiveness over time or when removed
lessens intrinsic rewards
Rewards must be valued & measurable to be useful. List possible problems with reward programmes.
AIMEL
- Agency
- Individual vs team rewards
- Measurement
- Extrinsic diminishing intrinsic rewards
- Locus of control
Agency costs arise when agents fail to act in the interests of principles. List some manifestations of agency cost.
PIMGC
- 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.
Who
What
How
Mix
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
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 interventiono Disclosureo 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
internal audit controls control processes
Identify factors that contribute to risk exposure.
poor structural safeguards
lack of understanding of 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
