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Key assumptions of traditional agency theory and their influence on approaches to compensation

There are two parts to this assignment. Part I addresses issues in financial accounting and comprises 55% of this assignment. Part II addresses issues in auditing and comprises 45% of this assignment. The word limits for this assignment are Part A 1,650 words (excluding headings, table of contents, in- text references, and reference list) part B 1,350 (excluding in-text references and the reference list). The assignment will be marked out of 100 marks. Part I [Total marks 55] Bill Strong is the founding director and Chief Executive Officer (CEO) of the Strong Built Construction Company. After an extensive executive search, Susan Bold has recently appointed as the new Chief Financial Officer (CFO) of the Strong Built Construction Company. At a recent board meeting discussions arose about profitability and the compensation of executives.

The construction industry has been in a downturn due to government austerity measures. Bill has a high public profile and is well-known in the construction industry. His dynamic personality and leadership charisma are attributed to the success of the Strong Built Construction Company in maintaining revenue at similar levels for the last two years, while other construction companies have faced drops in revenue. Although the Strong Built Construction Company has been successful in maintaining its revenue levels, profit before tax has fallen. A recent employee survey revealed falling levels of employee motivation. Members of the board have been questioning the current approach to executive compensation that rewards employees with company shares that are held in trust for three years before employees are able to sell the shares. Bill Strong is trained in economics and argues that the conventional agency theory approach to executive compensation where employees receive monetary benefits helps motivate employees. Susan Bold explains that intrinsic considerations need to be taken into account in determining executive compensation.


Required: You are Susan’s assistant and you have been asked to prepare a report that is backed by scholarly literature addressing the following issues regarding approaches to compensation:


a. Typical elements of compensation packages (6 marks)

b. Outline the key assumptions of traditional agency theory and their influence on approaches to compensation (8 marks)

c. Explain the difference between extrinsic and intrinsic motivation and the relationship between the two motivations (6 marks)

d. How might an employee’s attitude to risk influence their desired compensation package? (Only need to consider risk averse employees and risk seeking employees) (4 marks)

e. How might the time period when employee receives a financial benefit influence they desire for the benefit? (4 marks)

f. What role do fairness considerations have when determining compensation? (4 marks)

g. Why an executive compensation committee may provide benefits in determining compensation. (3 marks)

h. How to structure an executive compensation committee to achieve the best outcomes. (6 marks)

i. Conclusion: use the information in your previous answers to develop recommendations for determining compensation that enhance job satisfaction and work motivation. (4 marks)

j. Appropriate report formatting (title page, table of contents, introduction and appropriate headings) (6 marks)

k. Adequate in-text references and reference list following Harvard style (4 marks)

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