Assignment: Management Compensation
Answer each of the questions below with a minimum of 100-125 words each.
QUESTION 1: One of the areas of compensation design that is very important is that of management compensation. In addition to fixed salaries and bonuses, many top level employees are offered employee stock options. Employee stock options (ESOs) are defined as the common stock of a company with a call option that is granted to an employee as part of their compensation package.
The accounting for ESO has often been debated, especially over the last several years. Currently, ESO are required to be recognized on the income statement, but they weren't always required to. Below I am attaching two articles for you to read up on this topic:
FASB's Plans Regarding the Accounting for Employee Stock Options
https://www.fasb.org/jsp/FASB/FASBContent_C/NewsPage&cid=900000004142
Accounting for Stock Options
https://www.nysscpa.org/cpajournal/2005/805/essentials/p30.htm
What are your thoughts on these articles? Do you agree with Congress' initial opposition to FASB's attempts to require that these stock options be included as income?
QUESTION 2: The majority of the topics we have discussed when it comes to measuring performance within a company have been on financial performance measures. While the financial performance of a company is extremely important, it is also important to have non-financial measures. Having non-financial measures allows a company to be well-rounded and successful in more than one area. When companies are solely focused on just financial performance, there is more of a risk for fraud, because the company wants to do whatever it can to meet financial targets. So, having a mix of financial and non-financial targets gives a company balance.
Some of the non-financial performance measures companies have are in customer service, employee turnover and employee satisfaction. One example I have of this is at my previous place of employment in the healthcare field. The company used to have employee satisfaction targets. Once a year, we were given anonymous surveys on our work environment, management and job functions. Each department manager's bonus was tied to the results of the survey. If employee satisfaction did not meet the specified target, then the manager's bonus was impacted. The company really wanted to make sure that they stood out in the industry in the area of employee satisfaction.
Class, do you have any examples of your place of employment having non-financial performance measures?
QUESTION 3: In addition to the normal calculation of Return on Investment (ROI), there are two other alternative components that can be used to calculate the ratio. ROI can also be calculated using capital turnover (CT) and return on sales (ROS):
ROI = CT x ROS (Williams, Haka, Bettner&Carcello, 2015)
Capital turnover gives us a measure of "how well the capital invested in assets is generating sales" (Williams et al., 2015, p.1083). Return on sales gives us a measure of the operating earnings from each dollar of sales. Each separate component of ROI gives management an opportunity to make adjustments in key areas of the business in order to improve their ROI.
Class, in addition to ROI, what some examples of some other financial ratios that companies use to gauge their performance?