This website uses cookies to ensure you have the best experience. Learn more

Comments On Bonus Scheme Hypothesis Essay

1637 words - 7 pages

Comments on Bonus Scheme HypothesisPositive accounting theory (PAT) has made a significant contribution to our understanding of corporate financial reporting practices. Particularly, it provided an explanation of managers' choice among accounting methods and established the existence of incentives for earning management. Managers' choice of accounting methods is explained in terms of the underlying trade-off between these various incentives (Beattie et al. 1994).This essay is related to the 'strong association between accruals and managers' which interpreted by Healy (and other). In this essay, two major hypotheses under PAT, competing hypothesis (so-called bonus plan hypothesis) and income-smoothing hypothesis, and related empirical research, will be mentioned to support the discussion.Healy (1985, p.106) discussed that 'bonus schemes create incentives for managers to select accounting procedures and accruals to maximize the value of their bonus. Specifically, managers are more likely to choose income-decreasing accruals when their bonus plan upper or lower bounds are binding, and income-increasing accruals when these bounds are not binding'.In Healy's research, he defined accruals as the difference between reported earning and cash flow from operations. Put another way, net earning can be thought of as cash from operations, plus accruals. If managers are focus on the reported earnings, then the role of accruals as an earning management tool because: for a given amount of cash flow from operations, reported income is increased by positive accruals, and decreases by negative accruals (Gao & Shrieves 2002). This implies the possibility for managers to adopt accruals if there are intensives for them to adjust reported income.In addition, accounting earnings are often used to calculate the managers' payoff (Smith & Watts 1982) because it is a more efficient measure of the manager's performance than other measures such as stock prices and realised cash flow. Using the accounting earning as the measurement, however, not like stock prices, could cause the potential risk for managers to adopt accruals to increase their own wealth because the executives have the ability to manage earnings.Healy's conclusion is under the PAT which base on the central economic-based assumption that all individuals' action are driven by self-interest and that individuals will intend to act in an opportunistic manner to maximize their wealth (Deegan 2006).Beattie et al. (1994) also point that in the opportunistic behavior setting, managers are assumed to maximize their own wealth, which depends upon performance-related cash bonuses.Important follow-up research relating to Healy's bonus plan hypothesis has been do by Kaplan (1985), Gaver et al. (1995), Holthausen et al. (1995), and Degeorge et al(1999). They provided a broader discussion and extend Healy's work in related area.Similar to Healy's hypotheses, the test results by Kaplan (1985) suggest that (1) accrual...

Find Another Essay On Comments on Bonus Scheme Hypothesis

How managers design a reward scheme within an organisation and evaluate

753 words - 3 pages argues that deviating from the "market" rate would negatively impact on firm profits. By contract the "efficiency wage hypothesis" argues that paying above market wages may be more "efficient". Then we should focus on some key points on the efficiency wage hypothesis. Higher relative salary could give employer an advantage in the labour market, reduce performance problems and labour turnover, and then employee may increase effort and performance

Unfair Labor Practices Essay

1366 words - 5 pages This week’s assignment presents two cases studies involving employers who may or may not have committed unfair labor practices under the Labor Management Relations Act (LMRA). The two case studies, “Discharged for Facebook Comments” and “The Disputed Safety Bonus”, present two different employment scenarios where the behavioral actions of the employee lead the employer to terminate their employment (Holley, Jennings, & Wolters, 2012). In both

a case study into Socomec Ltd

2330 words - 9 pages above, the inputs in this situation are the number of customer visits per day, the amount of days on the road etc and this can relate directly to the performance that is monitored on the turnover. However market forces can play a major part in the 'poor' performance of any of our sales engineers. Couple this fact with the consideration that none of the three engineers consider the outcome (bonus) worth extra effort and the diagram above in figure

performance related pay

1805 words - 8 pages as a bonus earnings or pay levels based on measured quantities or values for the whole establishment. Organization wide incentive plans reward employees on the basis of the success of the organization over a specified time period. These plans seek to promote a culture of ownership by developing a senses of belongingness, cooperation and teamwork among all employees. There are three basic types of organization wide incentive plans; profit sharing

remuneration analysis

2408 words - 10 pages base salary (WH Smith Annual Report 2012). The director's bonus is based on the current year's profit, rather than the trends in profit. Since 2009 to 2012, executive directors’ bonus was range from 42.8% to 50.9%. 4.2.4 Pension Entitlements According to WH Smith 2012 Annual Report, the executive directors made contribution of their pension scheme from basic salary respectively 3% for Kate Swan and 5% for Robert Moorhead and Steve Clarke. The

Reasons Why Roosevelt Introduced the New Deal

1039 words - 4 pages , or in some cases made it worse. In 1930 he put taxes on good imported to America, so that instead of buying foreign goods, which would now be dearer, people would buy America's own goods. However this did not work; because other countries then put taxes on products coming from America. The ex-WWI soldiers were promised a $500 bonus, and in 1932, 25 000 people marched into Washington DC, and demanded their bonus payments

Business Report - Green Noodles

1880 words - 8 pages considered to adopt particular accounting method to maximize their self-interests (Knight 2005), but this new option of the share based payment may impact managers’ bonus which they will not get bonus based on their performances but based on their shares. Additionally, to consider bonus plan hypothesis, the fair value assessment and measurement are very complicated, which leads to the increase in finance costs then impacts on company’s income

The Medals of Halo

3602 words - 14 pages >\_/ \_/ \_/ \_/ \_/ \_/ \_/ \_/ \_/ \_/(KP)Name: Double KillKills within 4 seconds after each other: 2Looks Like: 2 StarsCarnage Report View: SameMessage: Double KillComments: Not really that hard, you just have to sneak upon two people in a fire fight and just kill them both real quick.A Sword, rocket, or grenade can do this easily.Difficulty: 4/10Bonus: 1Games: AllName: Triple KillKills

Proposed Compensation Scheme for Nike, INC

1353 words - 5 pages , wherein aside from daily wages, Nike employees (i) take part in a Performance Sharing Plan comprised of an annual bonus plan to reward both individual and team successes; and (ii) can participate in an Employee Stock Purchase Plan (NUY Job Source, 2013). 2. Benefits such as medical, dental and vision coverage; life and disability insurance; 401(k) plan; and, discounts at Nike outlets for Nike products. 3. Paid time-off, based on the following

Relationship Between Dependency and Power

1117 words - 4 pages able to reward Employee 1 with a financial reward when he/she complies with the managers directives; therefore Employee 1 strives to comply. Intertwined in this scenario we see the use of coercive power as well. Employee 1’s manager uses the evaluation and the possibility of a bonus as a tool to persuade his team to work more than the obligatory hours. Mr. Robbins’s comments on coercive power, “The coercive power base is dependent on fear. One

Earning Management

5841 words - 23 pages membuat pernyataan, Karno Basuseno C2C605201 4 ABSTRACT This study aims to analyze and provide empirical evidence of the influence of ownership structure on earnings management. The hypothesis (1) There are negative effects of insider ownership on earnings management, (2) There is a negative effect of ownership on earnings management institutions, and (3) There are negative effects of external ownership of the block-holders against earnings

Similar Essays

Econ Written Report

846 words - 3 pages Au Nga Sze 13085067DAF1605Introduction to EconomicsWritten report of Question 5.5 and 6.1Question5.5Mr. Smart designed a reward scheme for Peter and Paul. One is gives oneself $10000 bonus, and the other one is gives another salesman $30000 bonus. Peter and Paul can choose either the first one or the second one.Part (a) requires us to construct a payoff matrix of Peter and Paul. If both Peter and Paul choose to give oneself $10000 bonus, both of

Analysis Of Violence In The Media

1190 words - 5 pages a day of television, which I presumed to not be true. Set Criteria To set the criteria for a decision, we state the level of significance for a test. In hypothesis testing we collect data to show that the null hypothesis is not true, based on the selecting a sample mean from a population. The news can be so depressing and will make you not want to watch it, read about it or listen to it. Despite falling crime rates across the world

Reward Management Essay

3575 words - 14 pages reward schemes. The survey revealed that although many of the employees were dissatisfied with the reward schemes in place, they still preferred them in some form rather than having no incentive based pay scheme. In addition the individual reward scheme was favoured over a wide ranging bonus scheme which would reward all employees when company goals and performance objectives were achieved. Blue-collar rewards scheme Spotters Fee The

Scheme $6000: A Benefit To Both The Government And The People Of Hong Kong Or Not?

2222 words - 9 pages time management. Hong Kong Government can do a lot better in time organising to save our time. Giving everyone $6000 actually pays more than that $6000 used on each person. Indeed, “Scheme $6000” involves other costs, such as administrative cost and the $200 bonus of deferred receipt of $6000. According to the document of the Finance Committee, “Scheme $6000” leads to a large financial implications, besides paying $6,000 to eligible persons