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Abstract:
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The distinction between shareholders and management is one of the most important features of modern organizations. An overwhelming majority of large-scale organizations in developed countries are based on this corporate structure. It is important to note that this distinction only started appearing from the beginning of the twentieth century. This separation has resulted in a huge success as shown by the growth of multi-nationals all over the world. Due to the importance of this corporate structure in today's business world, the conflict of interest between shareholders and managers has been the subject of attention from both the academics and the business world. Executive compensation is one of the major tools of resolving this conflict through incentivization. The other tool is monitoring as described by Jensen and Meckling (1976). The inspiration for this study draws from the objective of analysing this relationship between shareholders and managers and how the conflict of interest can be reduced by executive compensation. The focus of the study is to look at how share options, as part of axecutive compensation, help in alleviating this conflict of interest and to what extent are they used because of accounting treatment. A particular focus of the study is to analyze the different nature of agency relationships in different types of industries and hence the different types of executive compensation used to solve the agency problem. The chapter on Reward Management highlights the basis behind the very principle of using compensation strategies to alleviate conflict of interest between principal and agents. Regional differences that exist across the world in the major industrial economies with regards to executive compensation are also highlighted thus providing a view into the issue from a global perspective. This dissertation analyses executive compensation in a sample of four public limited companies quoted on the London Stock Exchange where executive compensation is an important part. The objectives of the disseration include analysing the compensation structures of the sample companies in light of theory on executive compensation, the effect of accounting rules on design of executive compensation packages, and the effect of expensing share options on important accounting ratios, e.g. earnings per share. The dissertation is structured in two main parts, i.e. the Literature Review and the Case Study Analysis. Literature review looks at the theorical basis of executive compensation, analysing the theory of agency problem, separation of ownership and management and design of compensation contracts. It also analyses the accounting issues involved in executive compensation such as expensing of share options from earnings and theory of option valuation. Lastly, it presents the research questions based on the theory analysed above, which are then evaluated in the Case Study section.The Case Study Analysis section includes the research method chapter that describes the methodology used in selecting companies, the methods to value share options and the accounting treatment of share options in the income statement. Selection of companies is based on two aspects, i.e. industry and size. Valuation of share options is based on the Black-Scholes formula for valuation of share options. This section also includes a chapter analysing the basic compensation structure for each company in light of its industry sector and size along with a description of its operations and recent developments. The empirical results from the analysis of executive compensation structures are also presented in this section that summarize the value of total executive compensation including the value of share options and the impact of expensing this amount on important accounting ratios such as EPS, ROA, and ROE etc. In the end we summarize the conclusions obtained from this study with a special emphasis on how the industry sector end the size of the firm influences the structure of the executive compensation. /Kir10 |