Corporate governance deliberates on the established principles, systems and procedures through which competent individuals govern an entity (Colley, 16). The directors of the business entities formulate the principles by which the company can be controlled to meet the set objectives of the business. In truth, the fulfillment of the goals will bring additional value to the company as well as the stakeholders in the long run. In reality, corporate governances assume the role of our inner ear. This is because the inner ear is not visible when an individual walks, same to the organization’s system of governance procedure that can hardly be visible in the daily running of the organization. However, when the ear is dysfunctional, the effects and systems are visible to everyone; the individual loses balance and direction. Similarly, the symptoms and effects of poor governance are observable (Kim and John, 76).
Furthermore, governance reflects on the exercise of authority, power and the rule of law in an institution’s economic, political, and administrative dimensions. Both leadership and governance embraces accountability and transparency for they go hand in hand.
Governance is completely based on leadership of the institution. The impulsive investment of the organization in the development of leadership is entirely steered by the notion that the leader can be made; and it is further predicted that more effective leadership will lead to improved outcomes of the organizations. In the recent past, studies have been conducted by scholars on the dimension of managing their incomes as well as reports on financial frauds in the companies. Monks et al (2007) stated that codes of conduct are just one of many components within an organization that may influence ethical behavior. In addition, there are varied both informal and formal measures in the organizations that are considered to have an effect on ethical behavior.
A study conducted on governance and ethics in the United Kingdom revealed that there has been an increased trend to associate ethics and corporate governance (Monks et al, 2007). The organizations in Australia have a defined code of ethics that assist in the reduction of the financial embezzlement in various institutions. Indeed, the key issue to rise in governance and ethics should begin with the directors themselves in order to embrace ethical culture in the organization (Monks et al 2007). In reality, effective ethics and behavior with control measures will ensure transparency and ethical financial reporting. Corporate governance and the essence of ethical behavior have been viewed differently with different researchers.
An interesting contribution in the area of corporate governance and ethics identified major areas of weaknesses in exercising the indulgence of corporate ethics and corporate governance in Australia. It is important to justify that corporate governance has a perennial influence on the ethics of the institution. Therefore, it is mandatory for the organization to exercise ethical behaviors for the meaningful implementation of both formal and informal behaviors. Furthermore, the management hierarchy should employ ethical behaviors considering the code of conduct prescribed.
The shareholders’ stand point in Australian entities on the rate of remuneration in the business entity cannot be overlooked. Whether corporately owned or privately owned entity, they are the employers of the corporate society. In work, the executive is directly accountable to the owners of the business. The accountability is to run the business in accordance with the shareholder’s wishes. When this is overlooked, the consequences can be better than imagined. Certainty, internal conflicts between the two parties will transpire. Therefore, when the shareholders are dissatisfied by the company’s remuneration reports, they are the final decision makers in regard to this perception (Čadež et al, 485).
According to Dirke (229), the remuneration systems in an organization refer to the salaries and wages rewarded to the employee of the organization. The salaries are directly proportional to the performance level of the managers’ and the general staff. The rate of encouragement remunerated to the employee and the staff can either motivate them to increase their performance financially or de-motivate them to lower their financial performance. In the long term, the cases of financial account forgery are greatly reduced.
The effects of short term remuneration to the employee have an adverse effect on the productivity on the firm. Monks et al (29) indicated that with short term system of remuneration, more cases of financial fraud have been reported. However, the findings shown that forging of accounts in the long term is not easily achievable as the managerial remuneration and financial output are confidently correlated. Short term remuneration also indicates the incompetence level of the executive and as long as they remain in the management role, the more cases of financial loss to the company.
Secondly, short term bonuses to the employees cultivate the motivation of the employees via monetary compensation. Instead, the motivation of the employees should be entirely based on either concrete or intangible incentives to the employee. Short term earnings based on bonuses are assumed to be the primary procedure used to measure the performance of the employees. Actually, in some cases it is used to figure out the level of employee worthiness. A dissimilar opinion by (Wolk et al 2007) asserted that the performance of the employees cannot be tied to the rate of earning received.
Mallin (114) pointed out that according to compensation and agent theory; the managers of the business are likely to have their fair share in mind before the stockholders wealth. This is because the managers believe that the entire responsibility is more of their risk than the shareholders. However, the shareholders increase their wealth through increasing the stock (Wolk et al 2007).
As per se, the managers bear the largest risk of the business. He makes financial decisions, investment decisions and shareholders’ value in the entity. Indeed, if this is wrongly done then the business will be at risk of collapsing. They argue that the shareholders bare a smaller risk as they can control their risks by investing in more than one company.
Lastly, in favors of short term bonuses the managers of the company may feel external pressure and hence be rewarded handsomely (Čadež et al, 487). A competitive labor market will constantly look for new managers to recruit into their pool of professionals. Therefore, when the company does not reward their managers well, the best ones will be poached by the competing partners.
Colley (106) asserted that earnings based on short term bonuses can cause great conflict of interest in the company. This can majorly be motivated when the earnings are based on the corporate effort by the staff especially if the company finds collaboration more effective for their outcome. For example, an employee working alone may work harder than the rest to maximize the income while the rest may not have the same spirit. However, when the firm prefers group activity, it can lead to conflict of interest because the level of commitment to work will be different.
Conversely, there are employees who get motivated with the potential of bonuses. This may be due to the revenue they generate when they work on short term rather than long term. In this case the employee will prefer short term over the long term bonuses. In truth, short term bonuses may motivate the employee to finalize his or her financial deals more conveniently than long term pay. However, this may cost the company because the relationship between the employees will be indefinite and cultivated relationships have a positive impact on the productivity of the firm. Therefore, these effects will absolutely strain the financial muscles of the company if not well managed (Dirke, 44).
Meanwhile, a high compensation to the management results in the high financial output of the company. Furthermore, the companies are able to bring more competent and trustworthy managers on board. This is because the higher wages has the ability to attract more professional managers. Additionally, a company with prudent expertise in a managerial role wills generally improve the productivity of the company. Therefore, long term remuneration to the members of the organization is convenient for the positive productivity of the business (Kim et al, 229).
Globally, the companies have suffered sharp criticism from various stakeholders for their short term bonus programs. This has seen the chief executive officers the members of the business receive huge bonuses as their rewards. This controversial subject has made the stakeholders to criticize the executive of greed. Short term bonuses can at times be unfair especially during a financial crisis and unstable economy. A variation of research on using bonuses to reward employees has brought varied outcomes. In some research, they argue that it is the best procedure to get world class employees and a good motivator of the employees as effectively hence short term bonuses are the best for the company (Monks et al, 2007). Although, some research on this area asserts that employees are not necessarily motivated by thefinancialincentivesandthereforeunhealthyforboththecompanyandthemembers of the business.
Contrary to this argument, some researchers observe that very high levels of remuneration to the managers and the whole staff will make them too rich. In addition, they say that the rich employees will careless about the management of the business and this leads to failure (Mallin, et al, 2004). Report done by the researchers indicates that bossy people are more likely to become lazy in the workstation. This is because they feel satisfied with the fatness of their wallets and discontinue working hard in the organization. In general, a negative impact will be realized as the business productivity will aggressively collapse.
Long term pay incents the employees to work hard and reach the highest level of performance in the place of work. They hit the targeted sales outlined by the business thought they may not. The management usually grants rewards and bonuses to the high performing employees and managers. In this manner, the manager and the company will achieve their fair share and hence create healthy working relations (Kim et al, 2007).
On the contrary, long term incentives also have its drawbacks. Firstly, the level of motivation can drop drastically when the managers reach a specified performance level. Once they hit the target, some will leave their offices and turn to some other activities that are not beneficial to the company. For example, a manger can be spotted playing golf while he or she should be in the workstation.
Secondly, long term incentives may alter timings of the company in regard to the plans laid down. This can happen when the employees hit the target early in the financial year and wait until the next season to engage in work again (Cadez, et al, 2012).When this happens, the whole business will in a big mess since plans are like estimations. This means that plans can either be met early in the financial year; late in the financial year or may be the plans may never be met.
Some researchers’ also argue that long term pay punish the employees of the prospective firms. They assert that punishment and rewards that are related with long term pay are both sides of the same coin. This can happen when the employee expects a reward and by the end of the day he does not. The dissatisfaction that is brought by this is a total torture to the employee who by virtue expected the reward associated with the long term pay. According to Cadez (53), employees shy off from taking the risks because of the long term pay but they only do what is necessary to achieve the benefits associated with long term pay.
In conclusion, several advantages and disadvantages of both long term pay and short term incentives are outlined in this paper. Meanwhile, a comprehensive analysis should be done to determine the most convenient procedure for compensation. In a proposal by several stakeholders, a combination of basic salary, incentives, bonuses and rate of commissions should be determined depending on the level and competency of the employee. Therefore, the members of the business get remunerated in accordance with the qualifications.
Čadež, Simon, and Chris Guilding. “Strategy, Strategic Management Accounting and Performance: A Configurational Analysis.” Industrial Management + Data Systems. 112 (2012): 484-501. Print.
Colley, John L. Corporate Governance. New York: McGraw-Hill, 2003. Print.
Dirke, George C.Employee Remuneration and Incentives. London: Distributors: Gee & Co, 1954. Print.
Kim, Kenneth A, and John R. Nofsinger. Corporate Governance. Upper Saddle River, N.J: Pearson/Prentice Hall, 2007. Print.
Mallin, Chris A. Corporate Governance. Oxford: Oxford University Press, 2004. Print.
Monks, Robert A. G, and Nell Minow. Corporate Governance. Malden, Mass: Blackwell Pub, 2004. Print.
Wolk, Sanna. “Remuneration of Employee Inventors – Is There a Common European Ground?: A Comparison of National Laws on Compensation of Inventors in Germany, France, Spain, Sweden and the United Kingdom.” Iic : International Review of Industrial Property and Competition Law. 42.3 (2011). Print.