ContemporaryIssuesinAccounting2014Assignment2Duedate:Monday3November2014at1pm(Adelaidetime)Length:2,500wordsorequivalentWeighting:25%Thisassignmentmaybecompletedingroupsofupto3students.Groupsarenotcom...

Principle of Short term Bonus and Long Term Equity Bonus and its position in the Agency Theory
Total words – 2284
Table of Contents
3Abstract
4Introduction
5Procedures
5
Conflict between Managers and Shareholders
5
Ways to eliminate such risk
6
Bonus scheme
6
Non-salary component
7
Short term gains vs. Long term benefits
9Conclusion
10References
Abstract
Agency theory states that the firm can be seen as a link between the resource holders. As a matter of fact agency theory begins when one of the parties that are the principal hire and the other is the agent. Agents can be described as one or more individuals who provide service and in turn also provide the decision making and taking ability to the agents. The main agency relationship in business consists of stockholders and managers and that of between the stockholders and debt holders. Agency theory is also associated with agency conflicts or conflicts that happen between the agents as well as principals. It is also linked to corporate governance as well as business ethics. When agency happens it gives rise to agency costs and these costs are essential in running a business and steer the business in the co
ect path. These expenses are essential for the sustenance of the agency relationship. It can be said that the agency theory is one of the potent model in the financial economic model and is researched in the business. In a formal manner it can be said that the concept is huge and needs much debate.
Introduction
Agency Theory can be described as that
anch of financial economics which looks into the conflict of interest which arises between people who have different interest in the same assets. Basically it stresses upon conflicts which arise between the shareholder and managers of that of companies, bond holders as well as shareholders. This theory establishes a link between the principals and the agents. In this link the major emphasis is on how an agent will perform and it strives to address two main problems which are:
· How to align the goals which will enable the principal so that no conflict arises and
· Reconciliation can be done between the agent and the principal.
For addressing the conflict it is essential to consider the class of shareholders and the conflicts which arise between them. There are many conflicts that can arise in the normal course of action. In the agency theory various clauses are taken into consideration that enables the company to keep the risk at bay.
Procedures
· Conflict between Managers and Shareholders
As a matter of fact agency theory gives rise to some potential problem in the entire organization which is known by the name of self-interested behaviour. It is to be known that the manager of a corporation may contain certain personal goals which challenge the goal of the shareholders wealth maximization. As the shareholders provide full fledged control to the managers to utilize the assets of the company hence it may create a rift between the two groups.
It is well noted that agents can enhance their own self-interest rather enhancing the best interest of the firm that happens due to the fact that there appear asymmetric information and uncertainty. The self interested behaviour can be justified by the fact that managers utilize the resources of the organization. They consume the resources of the company in the form of perquisites and avoid the optimal risk position (Balsam, 1998). On the other hand the managers that are risk averse pass these opportunities to the shareholders so that they get an enhancement in the investment done by them.
One of the other problems which arise is when the manager of the firm owns less than that of 100% stock of a firm. If the firm happens to be that of a sole proprietorship then the owner or the manager will strive to enhance the personal gains. The owner will therefore utilize the concept of personal wealth but will definitely try to eliminate other considerations. Hence, if the investor sells a portion of the stock to others then the concept of agency conflict arises. In this scenario the owner or the manager will strive for a more leisure lifestyle and will not work for the 100% wealth maximization because less wealth accrues to the manager (Shank man, 1999). On the other hand more benefits will be consumed by the...