Balancing Managerial Pay and Performance Measures
Some organizations have moved from payment related to occupation to pay in terms of performance, these have enabled employees to deliver an outstanding performance, but I have also come with several risks, for organizations to deal with this risk they have sought to make the following considerations when choosing managerial pay and performance measures
- a) Goals and objectives of the company
Organizations recognize the importance of profits in the organization which is increased by the maximum performance of the employees. This will in turn result in profits for the shareholders. However the goals and the objectives of the organization must also be considered. This will help know whether the firm is moving towards its vision and mission in the larger society as it generates maximum profits. The organization must ensure that its role in the community is met regardless of the profit margins otherwise the organization assessment can still show that its performance is not okay. This is done by looking at the goal, vision, mission, and objective of the organization (Gitman & Flanagan, 2015). The risk of the company deviating from its vision and purpose would have been dealt with.
- b) Quality of work and creativity
Paying because of performance might lead to a reduction of excellence in the effort of maximizing output by the employees, especially in an organization where the performance is measured regarding quantity. An example is in a publishing company a professor might write several articles, yet they are of poor quality, the organization has therefore sought to ensure that their quality of production is excellent. At the same time, it might discourage creativity as actions are just ritualistic therefore organizations assess the rate of creativity to see if it allows creativity in the organization.
- c) Ethics
It is quite vital that the organization encourages the ethics in the organization even in maximizing the output of the employee (Williams, 2016). Some workers may opt to take shortcuts and to avoid critical processes in their activities to increase production the organization, therefore, encourages that there be a good performance but according to the organizations and country’s ethics.
- d) Teamwork and health
Organizations balance between choosing managerial pay and performance by looking at the approach of the payment towards teamwork (Cao, Lemmon, Pan, Qian & Tian, 2018). In organizations where the amount is because of production, the employees might start to scramble and fight over the person with the best performance that could even make them unhealthy organizations (Muller, 2017) therefore choose measures that will not create conflicts between the employees.
Using Bonus Plans to Reduce Agency Problems
I used the remuneration report of National Australian Bank (NAB) which is among the leading banks in the country headed by Andrew Thorburn as the chief executive officer (CEO), I used their annual remuneration report of 2017.
In the year 2017, the board decided that oversees remuneration including that of the CEO assessed the structure and sustainability of the remuneration framework. The amount that is short-term includes fixed compensation such as the salary, benefits, the allowances, and the short-term incentives. The amounts that are long-term in life including the long-term incentives that are issued regarding face value.
The pay of the CEO is approximately 4 million dollars per year comprising of fixed remuneration, long-term incentive (LTI) and short-term incentive (STI) (Epstein & Buhovac, 2014). The company emphasizes performance as a commercial organization and they have a Chief risk officer and a chief legal and commercial counsel that monitors this. The short-term incentive and the long-term incentive are fully tagged on the performance, and they are done according to the company’s performance rights.
The measures that are used in determining the CEO’s bonus are mainly based on performance (Nikolov & Whited, 2014). This includes the market-based performance which looks at the position of the shares and total share returns and delivery of the company service on the market, the interest rates, the performance hurdles, performance right and the dividends of the shares.
To increase the bonus of the chief executive officer, the focus should be on improving the performance since the salary is fixed unless the board decides to raise it. The CEO should, therefore, focus on better management in the organization’s service delivery in the market and in the performance management of all other workers to ensure that all of them performs at their best for the company to get more profits and for him to get the more short-term incentive.
Agency theory explains the relationship between the shareholders and the management (Pohler, & Schmidt, 2016). The administration may decide to revise the remuneration structure within the organization in ensuring motivation of the employees. It can also be done to increase the performance of the organization. This might lead to a reduction of the profits of the shareholders for a short time.
Agency problems are conflicts that occur when there is the difference in the interests of two groups’ example the shareholder and the managers. Bonus plans are structures that highlight the issuing of incentive to the employee following specific criteria, below I am going to discuss s their benefit in dealing with agency problems:
Examining CEO Compensation Contract at National Australian Bank
a) Most agency problems are financial in that the decision of the manager concerning finances are not in the interest of the shareholders (Reddy, Abidin & You, 2015). They do not help in increasing the shares of the shareholder in any way. An example is the buying of another organization or forming merges just so that the manager can increase their power and financial income. With the presence of the bonus plan, both the interest of the two stakeholders can be taken care of in that the bonus plan can indicate the amount the manager is to receive in case of expansion.
b) Another agency problem related to finance would be in a case where the manager decides to employ new stuff in a significant amount or just a few individuals to increase the productivity or rate of work in the organization. A lot of money can be spent on the worker’s salary especially if they are highly skilled leading to conflict. In the case of bonus plan, the conflict can be avoided since it shows the amount of money that should be spent on remuneration in a year and any changes if there are so that the shareholders expect and acknowledges changes in the organization.
A bank’s will and ability to give out loans or other lending activity is significantly affected by the financial situation of the area that requires the lending services, and without proper lending structures, the bank might collapse as seen with some organizations. As a recently appointed lending officer of a bank that is concerned about its lending in an environment that is currently facing an economic downturn, I will indicate how to safeguard the bank from risks of lending.
Firstly, before issuing any loan as an aligning officer, I would look at the accounting information of the person requesting the loan to see if they any previous records of loan mismanagement and if they have been not issued with investment. Secondly, having their accounting information will enable me to set lending limits (Authority, 2016) so that according to their accounts there is a limit that they cannot exceed in the borrowing of any resource.
Also, the covenant in debt agreement will be critical in the lending process in that I’ll ensure that the debt agreement contains clear instructions and credit terms to minimize arguments that might occur during payment (Reddy, Abidin & You, 2015).
Lastly, I would advise the organization to develop an insurance plan for the credit risk, and that regulation is established on how to deal with overdue accounts to avoid agency problems between the managers and the shareholders.
References
Authority, F. C. (2016). Embedding the Mortgage Market review: Responsible lending review.
Billett, M. T., Hribar, P., & Liu, Y. (2015). Shareholder-manager alignment and the cost of debt.
Cao, X., Lemmon, M., Pan, X., Qian, M., & Tian, G. (2018). Political promotion, CEO incentives, and the relationship between pay and performance. Management Science.
Epstein, M. J., & Buhovac, A. R. (2014). Making sustainability work: Best practices in managing and measuring corporate social, environmental, and economic impacts. Berrett-Koehler Publishers.Reddy
Gitman, L. J., Juchau, R., & Flanagan, J. (2015). Principles of managerial finance. Pearson Higher Education AU.
Muller, R. (2017). Project governance. Routledge.
Nikolov, B., & Whited, T. M. (2014). Agency conflicts and cash: Estimates from a dynamic model. The Journal of Finance, 69(5), 1883-1921.
Pohler, D., & Schmidt, J. A. (2016). Does Pay?for?Performance Strain the Employment Relationship? The Effect of Manager Bonus Eligibility on Non-Management Employee Turnover. Personnel Psychology, 69(2), 395-429.
Reddy, K., Abidin, S., & You, L. (2015). Does corporate governance matter in determining CEO compensation in the publicly listed companies in New Zealand? An empirical investigation. Managerial Finance, 41(3), 301-327.
Williams, B. (2016). The impact of non-interest income on bank risk in Australia. Journal of Banking & Finance, 73, 16-37.
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