Financial Accounting Theory: Considerations in a Pay/ Compensation Policy

Every successful company draws good performances from various aspects of its operations. One such aspect is the pay philosophy. Primarily, a compensation philosophy refers to the specific commitment every company has, which stipulates how it strategically views its employees with respect to remuneration. The most effective and efficient pay philosophy ought to provide a consistent frame of references that both the company and the employees use to agree on the most commensurate remuneration packages. The rationale for the above finds its basis in the fact that it is only through compensation that companies attract, successfully motivate, and retain their employees at all levels.

In light of the above, this report aims at analyzing and providing insight for the best compensation program XXX Ltd should use in the pursuit of attracting, motivating, retaining its top executives. All the considerations with respect to the analysis and the recommendations in the report follow the provisions of the Agency Theory as well as the provisions of Positive Accounting Theory by Watt and Zimmerman (Deegan 2014). In the pursuit of attracting, motivating and retaining the best executive and business leaders, the compensation committee for XXX Ltd should focus on designing the best pay philosophy with respect to the provisions of both the agency theory as well as the positive accounting theory. In so doing, the executives of the company will have the ability to drive strategic growth and financial objectives aimed at maximizing the shareholder value both short and long-term (Deegan 2014). The provisions of the above theories give way for the following recommendations.

  1. XXX Ltd Should Provide Its Executive Members With A Basic Salary That Is Above The Market Average

The compensation committee should ensure setting the basic salary of XXX Ltd executives slightly above the average competitive price in the industry. The nature of the work of business executives is naturally competitive. Therefore, the rationale behind setting the base salary above average is to continue in the mannerisms of attracting, motivating and retaining the executives with exemplary performance (Zoltners, Sinha and Lorimer 2006). In light of the above, the committee should confirm with the human resource department for updates, advice and guidance on determining the average competitive price in the industry under which XXX Ltd operates. However, the basic salary should be commensurate with the complexity, position, and responsibility of the various executives (Singer and Francisco 2009). By keeping the basic salary of the executives’ salary above the industry’s average, XXX Ltd will gain the necessary leverage suitable attracting and retaining top-notch executives.

  1. The Company Should Give Periodic Discretionary Awards To Its Executives.

Discretionary awards refer to periodic cash-based awards. According to agency theory as well as employee motivation theory, an immediate appreciation for exemplary performance is one key aspect that helps a business organization to get the best from its human resources (Bamberg and Spremann 2012). The most key human resource assets in any company are the executive members. Therefore, the compensation committee in XXX Ltd should design a flexible compensation plan that incorporates the awarding of discretionary awards for exemplarily performing executives. In the pursuit of the above, the committee should ensure prior computation and certification of the extent a single discretionary reward, with reference to the amount available in the discretionary award pool.

  1. The Company Should Incorporate Various Long-Term Non-Monetary Incentives.

The compensation plan for XXX Ltd should be sensitive enough to consider aligning its provisions with the interests of the company’s shareholders. By including long-term incentive awards, XXX Ltd will have the ability to retain its most key executives, which is in line with the positive accounting theory. The above is an action that proves that the compensation plan considers and promotes the interests of the shareholders (Whittington 2007). For every company, protection of the shareholders’ value is a key consideration (Riahi-Belkaoui 2004). In a long-term incentive based plan, the compensation committee should decide on who are the most key players among the executives. The above pass for consideration of receiving the various long-term incentive awards so as to keep them in the company giving their best in service to the company and the shareholders. The long-term incentive awards are mostly stock-based (Bamberg and Spremann 2012).


In short, the compensation committee for XXX Ltd should facilitate the provision of a base salary that is higher than the market average. The rationale for the above finds its basis upon the fact that every industry features a high degree of competitiveness with respect to the remuneration of company executives. Periodic discretionary awards are very important too due to the fact that a compensation plan should have its components tied to each executive’s performance (Katcher and Snyder 2007). In light of the above, the compensation plan for XXX Ltd should include annual, quarterly, as well as monthly performances bonuses.  Finally, with respect to the incorporation of various long-term non-monetary incentives, the company will benefit by tying up the top executives and having their services towards the company its stakeholders for the longest time possible.


Reference List

Bamberg, G. and Spremann, K. (2012). Agency Theory, Information, and Incentives. Berlin, Heidelberg: Springer Berlin Heidelberg.

Davis, M. and Edge, J. (2004). Executive Compensation. San Diego, CA: Windsor Professional Information.

Deegan, C. (2014). Financial Accounting Theory. 4th ed. Sydney, Australia: McGraw Hill.

Forbes-Pitt, K. (2011). The Assumption of Agency Theory. New York, NY: Taylor & Francis.

Katcher, B. and Snyder, A. (2007). 30 reasons employees hate their managers. New York: AMACOM, American Management Association.

Riahi-Belkaoui, A. (2004). Accounting Theory. London: International Thomson Business.

Singer, P. and Francisco, L. (2009). Developing a compensation plan for your library. Chicago: American Library Association.

Whittington, G. (2007). Profitability, Accounting Theory and Methodology. Mason, OH: Cengage Learning.

Zoltners, A., Sinha, P. and Lorimer, S. (2006). The complete guide to sales forces incentive compensation. New York: American Management Association.


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