Deck 18: Rewards, Incentives and Risk Management

Question 1

An organisation's chief executive officer can be both a principal and an agent.

Answer 1

A

Question 2

Successful companies need to carefully balance management control and risk taking.

Answer 2

A

Question 3

Agency theory recognises two kinds of information consumers. Which of the following describes the relationship between them?

A) Agents hire principals to hold them accountable for decisions.
B) Principals and agents work together in the best interest of the organisation.
C) Principals hire agents to make decisions for them.
D) Principals are government employees, while agents work in the private sector.

Answer 3

C

Question 4

What type of theory provides an analytical framework for the conflicts that arise between owners and managers?

A) Life cycle theory
B) Agency theory
C) Decision making theory
D) Evaluation theory

Question 5

Compensation contracts prepared to deal with the agency problem can be based on accounting and/or non-accounting measurements.

Question 6

Management accountants now need to integrate the impact of external reporting rules on their risk management and internal control policies.

Question 7

It is not possible to overcome the problem of remuneration bonuses having an upside bias.

Question 8

Managers can reduce agency costs through the use of compensation contracts.

Question 9

Agency theory is an analytical framework that tells managers how to solve potential conflicts with shareholders.

Question 10

Over the last 10-15 years there has been a decline in the use of share options as a component of executive remuneration.

Question 11

Reward systems at top management level are most commonly fixed payment packages.

Question 12

Relative performance evaluation (RPE), in relation to incentive systems, is about the comparison of company performance, using suitable measures, against the performance of a peer group.

Question 13

Research has found that in Australia in the last 10 years CEO's salaries have increased at 10 times the rate of shareholder's returns.

Question 14

When executive pay is linked closely to the firm's performance it is not possible for executives' pay to increase when the company's share price is falling.

Question 15

Decentralisation typically eliminates agency costs from for-profit organisations.

Question 16

To reduce agency costs, organisations implement various systems and controls to monitor behaviour, including:
I $\text {Publishing audited firaricial staternents}$
II $\text {Filing income tax retums}$
III $\text {Tying financial rewards to reported results}$

A) I and II only
B) II and III only
C) I and III only
D) I, II, and III

Question 17

Which of these is correct concerning agency theory? Normally the:

A) Chief Executive Officer (CEO) is a principal only
B) Chief Executive Officer (CEO) is an agent only
C) Chief Executive Officer (CEO) is a principal and an agent
D) None of the above is correct

Question 18

Agency theory is related to accounting because organisations incur costs, including the costs to produce accounting information, to solve conflicts that might arise between managers and owners.

Question 19

The main thrust of Australian government regulations concerning the payment of senior executives has been to ensure that payment is kept at a reasonable level.

Question 20

Whether compensation is structured to focus on the long-term depends on two key factors, firstly, the time horizon relating to the target measure and secondly, the 'lasting' nature of the reward itself.

Question 21

In Australia, subsequent to the Global Financial Crisis, the government commissioned an investigation into the compensation of senior executives to be carried out by:

A) the Productivity Commission
B) the AASB
C) the ASX
D) ASIC

Question 22

In the largest Australian companies bonuses typically make up what percentage of the total compensation package for top executives?

A) 40%
B) 60%
C) 20%
D) 80%

Question 23

"Reduce costs by 5%" is an example of a(n):

A) agency cost
B) benchmark
C) measurement
D) reward

Question 24

Regulation in Australia with respect to reward systems for senior executives is:

A) found in the Corporations Act
B) found in the ASX Listing Rules
C) there is no regulation in Australia that deals specifically with the rewards of senior executives
D) a and b

Question 25

It is common in accounting to define a 'long-term' view as:

A) 2-3 years
B) 2-4 years
C) 1-2 years
D) 3-5 years

Question 26

According to agency theory, under what circumstances could companies eliminate agency costs?

A) If bonuses are based on financial performance
B) If they publish audited financial statements
C) If their shares are not traded on the stock exchange
D) Organisations cannot eliminate agency costs

Question 27

To protect shareholders from excessive compensation practices, executive compensation packages are best set by:

A) A committee of primarily outside members of the board of directors
B) A committee of top management employees
C) The managing director
D) The complete board of directors

Question 28

Costs for producing and analysing internal performance reports are an example of which type of agency costs?

A) Losses from poor decisions
B) Monitoring costs
C) Goal alignment costs
D) Contracting costs

Question 29

The use of a bonus bank in improving the pay-for-performance link means:

A) that bonuses can be paid by direct bank transfer
B) that bonuses can paid immediately
C) that bonuses can be negative as well as positive.
D) b and c

Question 30

Managers can best reduce agency costs by:

A) Holding agents responsible for the results of their decisions and rewarding them for good performance.
B) Constantly monitoring agents' actions to ensure goal congruence.
C) Giving agents less decision-making authority.
D) Reporting residual income in their ASIC reports.

Question 31

Share-based compensation rather than cash payments is used to encourage:

A) a focus on short-term results
B) higher compensation for executives
C) a focus on long-range results
D) lower compensation for executives

Question 32

Because agents may not set the same goals and objectives as principals, organisations may experience which of the following general agency costs?
I $\text {Goal aligriment costs}$
II $\text {costs caused by excharige rate movernents}$
III $\text {Monitoring costs}$

A) II and III only
B) III only
C) I and III only
D) I, II, and III

Question 33

Which of these researchers argued that extrinsic rewards do little in the long term to foster superior performance?

A) Pink
B) Deming Kohn
C) Kohn
D) All of the above

Question 34

The correct statement concerning intrinsic and extrinsic rewards is:

A) A holiday paid for by the company for an executive is an extrinsic reward
B) Extrinsic rewards are non-cash incentives
C) A cash bonus paid to an executive by the company is an intrinsic reward
D) All of the statements are true

Question 35

From a business owner's perspective, which of the following is an agency cost?

A) Costs to provide appropriate incentive contracts for top management
B) General supplier price increases
C) Losses from poor economic conditions
D) Insufficient executive pay

Question 36

It is more likely that the performance of a top executive will be measured at which of these levels?

A) department
B) product
C) individual
D) corporate

Question 37

Which of these is an advantage of rewarding senior executives with cash rather than with non-cash payments?

A) It is likely to be preferred by a risk-averse executive
B) The lasting nature of cash
C) It helps to overcome the agency problem
D) All of the above are advantages

Question 38

Compensation contracts that provide incentives for agents to increase organisational value might include:
I $\text {Cash-based boruses}$
II $\text {Share options}$
III $\text {Cash bonuses based on share price increases or targets}$

A) II and III only
B) I and III only
C) I and II only
D) I, II, and III

Question 39

A manager under-investing in projects that are in shareholder's best interests but which may reduce the manager's own bonus payment, is classed as which type of agency cost?

A) Monitoring cost
B) Loss from incongruent goals
C) Loss from a poor decision
D) Contracting cost

Question 40

A current theme in rewarding senior staff is which of the following?

A) pay-for-performance
B) the place of government regulation
C) relative performance evaluation
D) all of the above are current themes in rewarding senior staff

Question 41

Which of these is a not a policy in a banking group that would help reduce company risk?

A) Requiring all employees to take regular holidays
B) Ensuring that incentive systems don't encourage excessive risk taking
C) Requiring more scrutiny of less successful traders and less of the more successful
D) None of the above, i.e. all are policies that would help reduce company risk

Question 42

Which of these is not one of the four categories contained in the CoCo (criteria of control) guidance on control integrated framework?

A) Strategic
B) Operations
C) Departmental
D) Compliance

Question 43

According to the CoCo (criteria of control) guidance on control integrated framework, a catastrophic computer failure would be classed as which category of risk?

A) Financial risk
B) Legal and regulatory risk
C) Strategic risk
D) Operational risk

Question 44

According to the CoCo (criteria of control) guidance on control integrated framework, the impact of a carbon pollution reduction scheme would be classed as which category of risk?

A) Financial risk
B) Legal and regulatory risk
C) Strategic risk
D) Operational risk

Question 45

Which of these is not a framework available to Australian top management when considering risk management?

A) AS/NZS ISO 31000: 2009 Risk management principles and guidelines
B) The COSO Enterprise risk management framework
C) The Australian assurance standards - AAS 340 -900
D) All of the above are frameworks that are available