Abstract
The research paper focuses on the Disclosure of executive compensation given to leaders. It tries to explain why this is important to be disclosed in an annual financial report; however, it also offers a few drawbacks since it compares which one outweighs the other. Executive compensation has been a topic for the longest time, and this paper summarizes it and looks at credible sources. It has incorporated a methodology and a study design that helps one understand why the Disclosure of this compensation is essential.
It looks at a few companies and outlines an overview of them, basing the findings on credible sources and the methodology used in the research paper. It gives some other basic information needed to supplement executive compensation, such as the law enforcement standards of these particular accounting branches and the court’s requirements in case of a lawsuit. It provides information on how to come up with the best executive compensation, the measures used, what to look at, and the parties involved in making this important decision.
Introduction
Executive compensation has been a factor that has been in discussion in many organizations in recent past years. It mainly includes the executive payment to leaders and the high authority of particular organizations. Therefore this proves the importance of these executive compensations. They are essential, especially for shareholders, when looking at these financial reports and the rest of the other members involved in these organizations. They are given to the executives as a present or as motivation to motivate the leader to continue working extra hard and performing excellently as needed (Haque & Ntim, 2020). The board, the executives, and the investors and shareholders in most organizations are responsible for coming up with this compensation. However, some do not use this strategy, but it is the right one to go by. However, these executive compensations are not only used to reward the leader but also for other important factors. If a leader performs excellently and the sales and profits are going on remarkably, then this compensation can be increased; however, it is bound to readjustment in case of anything especially difficult circumstances, such as pandemics that hit the World suddenly, for example, the COVID 19 which can bring everything to a standstill and cause more significant problems. Although on regular occasions, this executive pay should be given to these leaders accordingly and should be monitored keenly. Therefore there are several reasons why it should be included in a financial report all the time.
Literature Review
These compensations are significant because when they are not given to these leaders, especially in big companies, these leaders may leave the organization. This does not bring any good to an organization because authority is typically everything. They are the face of the organizations and tend to attract more clients. However, it is best to retain the best leaders with good reputations because clients tend to follow these; for example, a famous person with a good reputation and incredible innovation skills like Elon Musk can be an objective and a person that any organization would like to keep as a leader therefore at a greater length some of this executive pay varies with the particular leader.
The financial accounting and Statistics Board outlines particular rules to help follow up on financial records, and everything disclosed here, including debts, to avoid a financial crisis like those that happened in the past (Financial Accounting Standards Board (FASB). It mandates follow-up of these financial records, and so does the court. The court also gives particular standards that will help deal with such lawsuits (Arena et al., 2019). It demands that all the parties, that is, the executives, the board, and shareholders, take part in coming up with this executive compensation and also involve an independent party with this knowledge to help them in these incentives so that in the case of a lawsuit it gets easier for them and also in prosecuting at the fault of crime.
The courts and FABS demand that the board and executives consider many factors when considering executive compensation. Underpayment or overpayment of this compensation should be avoided. The size of the organization and an approximation of annual sales are also crucial factors to consider. The overall organizational performance is also a key element in this decision.
Executive pay helps retain good leaders that help in bringing more clients and helping put the organization at the top in a particular geographical area or even Worldwide. It can also help attract other good leaders not present in the organization. This will also help an organization further. The primary goal of investors and shareholders of a particular organization is to have the best of the best leaders in their organization. This brings another different sensation even in the employees because they improve their mentalities towards doing particular things in the workplace; therefore, executive compensation motivates these leaders.
There has been the need to display this executive compensation because they help weigh particular aspects of a company; for example, this allows investors to look at all the company’s statistics and make a relative comparison. For example, they compare the profits made by the company at a particular period of time and what the executive compensation sums up to. This can create room for adjustments. It is not logical for an organization leader to receive too much compensation when the company’s sales are coming down. This invariably means that some of this pay for the executives is bound to go down. The payment should be considered, and displaying gives room for adjustment. However, it is optional for this executive pay to go down. The more the sales and profits the company is making, this could go up, even giving room for more excellent leaders to join the organization.
The executive pay is also adjusted according to employee pay. Although this is made for the executives, employees should still get little money to be able to give the leaders more. At least, it should be logical. Everything should balance from sales to executive pay to employee wages. Displaying this pay helps even out these kinds of statistics. These three factors are the most important for a stable organization, and none should be exaggerated because it will disadvantage the other. Therefore, this makes everything more convenient and in place.
Executive compensation can help determine whether a leader is overpaid or underpaid. It also helps evaluate whether these leaders are underperforming or on the right track. Some of these leaders receive much compensation because they work in popular organizations; some do not deserve it. Investors mainly compare stock markets, and this can help them evaluate. If the stock markets are not performing well, the leader is underperforming; therefore, their compensation needs some adjustments. However, some of these leaders actually need their raise in payment. This is all determined by the factors these investors and shareholders use in their evaluation.
Companies that have put this executive compensation on Disclosure have had good relationships with shareholders and investors because they have proved to be transparent with the organization’s essential details, which aids in effective communication and strengthening of these interdependent bonds, which is an advantage for every party involved (Ferri et al., 2018). Voluntary Disclosure reduces agency conflicts; in the process, we broaden the understanding of the effects of voluntary Disclosure on corporate governance. This can also help push a leader to improve their skills and work extra due to increased pressure from the intensive monitoring of outside shareholders.
However, particular drawbacks come with this Disclosure. Other companies may view it may aid in “stealing” particular companies’ leaders. This has also been witnessed in the past several years. For example, if company X pays an amount to their executive, and this is disclosed in the regular annual financial report, and this particular leader is a famous person or is known for their outstanding capabilities. Company Y can offer this leader higher pay which they will not be able to resist. These can be a turntable, and instead of serving as a platform to attract good leaders, they have the capability to take them away.
Exaggerated amounts of executive compensation can offer a risk of increased unethical behavior. This is because these leaders are willing to do anything to remain in a position where they get vast amounts of money. Therefore they may engage in unacceptable behavior to remain in this position or acquire more. This may cost shareholders and investors the huge amounts of money they may have invested in this particular organization. Disclosure of high executive compensations can raise many eyebrows.
Methodology
Correlation methodology and study design were used in this research. It involved reading different sources, looking for information, comparing it with the related research question, and relating the executive compensation disclosure with companies that caused scandals due to incorrect faked financial records. WorldCom and Enron were used in this research design to show the various consequences of hidden records. Excess executive compensation to these leaders was also led by these financial records that did not display what they were required to.
Findings and Discussion
An analysis of different companies was done to show the significance of Disclosure of these compensations due to some cases that have been witnessed over recent years. Enron was an excellent example of a company that collapsed due to such circumstances. This was among the largest energy companies in the late 90s but fell drastically and was declared bankrupt in 2001. The main reason why this company fell was because of a lack of transparency. The C.E.O. of this company, including Lay and Skilling, contributed much to this downfall because of their involvement in Fraud and insider trading. Enron hid many debts for some time from their subsidiaries; however, these subsidiaries continued supplying them with the revenue they needed and used in their business. This was in a bid to convince shareholders and investors of the company that it was firm on its feet and was performing excellently. However, this was not the case. These are some reasons financial records must be monitored closely and the stock market as a whole.
WorldCom was also not an exception when it came to the frau scandals. It came to fall just like Enron. It had many fraudulent scandals in its balance sheets of up to 3 million dollars. Before then, their stock fell massively, a cause for alarm. They had weird close relations with individuals with whom they offered their contracts, and this was also an alarming issue, but once an audit was done, they could not survive it. Also, they indicated massive false amounts of profits they made, leading up to 10 billion, to make a false impression of their company. Ebbes and his financial officer boosted on buying a yacht and building a mansion which can be connected with the compensation they received. They were also declared bankrupt, and the financial officer and the C.E.O., Bernard Ebbers, were jailed. However, the C.E.O. served 25 years, while the finance officer only served five years.
Another great scandal was that of the Lehman Brothers. This was a bank in the United States that caused among the biggest scandals in the World. The executives took advantage of the lenders to help the company with some money. The company had a lot of poor strategies, such as taking significant financial risks and poor leadership, and also it was not very trustworthy in Disclosure. It had huge debts and used this to bring them out, as the profit the company was gaining was utterly false. It cost investors and individuals huge sums since it was a banking system. When filing for bankruptcy, it had a debt of more than 600 million dollars.
Executive compensation can help determine whether a leader is overpaid or underpaid. It also helps evaluate whether these leaders are underperforming or on the right track. Some of these leaders receive much compensation because they work in popular organizations; some do not deserve it (Gan et al., 2020). Investors mainly compare stock markets, and this can help them evaluate. If the stock markets are not performing well, then the particular leader is underperforming; therefore, their compensation needs some adjustments. However, some of these leaders actually need their raise in payment. This is all determined by the factors these investors and shareholders use in their evaluation.
Conclusion
Due to the several financial instances that have happened over the years, there is a real need to disclose executive compensation in financial reports. It can save a lot from occurring, such as past financial crises. It also helps with transparency issues both on the executives’ part and the shareholder’s too. This is because the executive will be well aware that there is no possibility of hiding, and the shareholders and investors will have a clear view of the real deal happening in a particular company. The FASD should make this a rule since it will save a lot of people’s money that they have invested in different companies and a lot of economies from the financial crisis. This can be an essential step that can help ensure that everything goes smoothly and nothing is being hidden in a particular company, including the debts and losses. These major ones have caused great havoc in the past fallen companies.
The fact that the court has put every leader of a company in the decision of coming up with an executive compensation has saved a lot since, in case of anything, all these leaders, the board, executives, and investors will always be well aware of what they are dealing with. In case of any dispute, they can solve it peacefully without too much involvement from the court since they all know the terms of the agreement. This is best since everyone will contribute to this decision, including an independent party ready to offer good advice on how to come up with this compensation. This will definitely reduce underpayment of this leader or exaggeration of the price too. Due to this close follow-up, the executive will also be in a position to perform considerably.
References
Arena, M. P., & Nguyen, N. Q. (2019). Compensation clawback policies and corporate lawsuits. Journal of Financial Regulation and Compliance.
Ferri, F., Zheng, R., & Zou, Y. (2018). Uncertainty about managers’ reporting objectives and investors’ response to earnings reports: Evidence from the 2006 executive compensation disclosures. Journal of Accounting and Economics, 66(2-3), 339-365.
Financial Accounting Standards Board (FASB). Corporate Finance Institute. (2021, March 18). Retrieved December 9, 2022, from https://corporatefinanceinstitute.com/resources/accounting/financial-accounting-standards-board-fasb/
Gan, H., Park, M. S., & Suh, S. (2020). Non-financial performance measures, C.E.O. compensation, and firms’ future value. Journal of Business Research, 110, 213-227.
Haque, F., & Ntim, C. G. (2020). Executive compensation, sustainable compensation policy, carbon performance and market value. British Journal of Management, 31(3), 525-546.
Kaya, E. (2019). The historical assessment of financial scandals. RECENT ECONOMIC APPROACHES & FINANCIAL CORPORATE POLICY, 121.
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