Executive Pay in Australia Essay

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Remuneration & Other Subjects

The authors of this report have been asked to assess a number of subjects surrounding remuneration of employees and the overall corporate/social ethics involved in the same in Australia. There are also some tangential and related subjects that will also be spoken of. In total, there are five broad-based questions. The first question speaks about risk aversion, profit/wealth maximization, wealth management, different stances that different people and personnel take vis-a-vis risk and financial reporting manipulation. The second question references the horizon problem. This second question looks at the different motivations and perspectives that different people in an investment and accounting situation might take. Managers have their axe to grind and stakeholders typically have a different one. How bonuses for investment managers figure in will also be explored. Finally, there will be a review for the fifth question that pertains to the transparency and visibility of remuneration consequences for even the stakeholders and investors for a firm. While some people including investors and analysts just like to stir the pot, there are indeed some valid concerns relating to the ethics, motivations, decisions and biases of investors, stakeholders and others involved in the accounting and/or investing within an organization.

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Question I - Risk Aversion

The underlying assumption of accounting theory, which is used to explain and predict behaviours, is that all individuals will act to further their own self-interest (Rankin et.al 2012). According to Kolb (2010), agency theory indicates that managers as agents, are assigned the task of day-to-day operation of a company by the shareholders as principals. However, a conflict arises as the self-interest of these two parties are not aligned. Classical economic theory suggests a higher risk strategy can result in higher rewards than those achievable from low risk approach. Shareholders are desirable of the higher returns, and typically, shareholders diversify their risk by having shares in multiple companies, and likely have other sources of income (Rankin 2012). Shareholders seek to maximize their personal wealth, which equates to a maximization of share price and dividends paid which increases with higher risk strategies (Kolb 2010).

In contrast, managers are likely to follow a risk averse strategy as their current salary and career prospects are tied to their current employment situation (Ferrarini & Moloney 2004). Managers are also likely to only focus on the short-term earnings that impact their current employment (Kolb 2010). To counter this risk aversion,….....

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