Management Compensation Research Paper Example | Topics and Well Written Essays - 1500 words

Management Compensation - Research Paper Example Compensation is an essential component of human resource management, which aids in motivation of employees, besides enhancing organizational effectiveness. Types of Management Compensation Management compensation encompasses both intrinsic and extrinsic components in the form of monetary benefits and non-monetary benefits such as paid holiday. Compensation incorporates salary, as well as other rewards and allowances given to employees in return for their outstanding services. Compensation can be depicted as representing base pay, long-term incentives, bonuses, stock options, and benefits (Davis and Edge 2). The goal based incentive (stock options, bonuses, and long-term incentives) is fashioned at aligning the corporation’s interests (financial success) with those of top managers. Description Management compensation is an effective means of enhancing the productivity of the employees and ensuring that deserving employees feel appreciated for their efforts. Some companies utili ze management compensation as a tool for fostering a performance-oriented culture where the employees focus on the company’s overall strategic goals. Management compensation is meant to motivate the employees, especially the top management within a company. The motivation of management compensation is to align the employee performance with the business goals, besides enhancing employee satisfaction and retention. ... Management compensation also enhances self-confidence, leading to self actualization. Management Compensation: An Incentive to Manipulate Accounting Reports Managers commit fraud because of the resultant economic benefits flowing from it. Given management’s self interest, executives may manipulate accounting earnings in pursuit of personal agenda, such as bonuses (Armstrong, Jagolinzer & Larcker 225). Income smoothing tends to be dominant in corporations applying internal performance standards compared to those using external standards. The downside of goal based incentives is that, besides encouraging managers to work smarter to deliver positive results (desired results), they also induce executives to manipulate financial results such as profit and share prices. This is an attempt to enhance their pay, which is itself a violation of executive’s fiduciary duty and a fraud (Laux and Laux 870). In most cases, companies design equity-based compensation contracts in order to provide executives with incentives meant to enhance stock prices via legitimate means. However, the contracts may also generate enhanced incentives to produce fraudulent financial statements or engage in actions geared at misleading analysts and investors on the stock value of the company. The incentives to engage in fraudulent activities may be serious in occasions where the executives believe that competition or other constrains limit their ability to enhance the value of the firm legitimately, and consequently reduce the incentives. Some studies show a likelihood of fraud in relation to incentives from unrestricted stock holdings compared to incentives from restricted stock. Managers at fraud firms tend to exercise larger portions of their vested options and are