financial accounting salary

financial accounting salary

The Impact of Financial Accounting Practices on Salary Determination

1. Introduction to Financial Accounting and its Relevance in Salary Determination

The purpose of this paper, then, is to examine the extent to which an accepted body of theory and methodology in the field of accounting impacts on the salary determination process, especially at the higher levels of management.

In the determination of wages and salaries for either an individual or an employee group, most human resource specialists use information available from past experience: what a similar individual has been paid in the past or what a competitor is paying for similar compensation. There is, however, a significant relationship between financial accounting practices and the determination of wages and salaries. This relationship arises out of the fact that accounting information is an input to the compensation decision process. Thus, in the structuring of compensation packages, particularly those designed to reward and motivate management, it is necessary to take account of accepted accounting practices.

Wages and salaries constitute the most significant cost element in almost every enterprise. Both employers and employees are greatly concerned with compensation. For employees, what they earn can determine not only their standard of living but also their status in society. Employers are concerned not only because the wages enter into the cost of goods sold but also because the manner in which compensation is determined affects employee morale and, consequently, the quality and quantity of goods and services produced.

I. Introduction

2. The Role of Financial Statements in Determining Salaries

Different stakeholders assign different levels of importance to the various elements of financial statements. Shareholders and other investors are concerned with a firm’s ability to service debts, pay dividends, and provide a return on their investment, as well as other aspects of the financial performance of a firm. Suppliers and trade creditors seek to ensure the continued solvency of enterprises to which they supply goods and services. Consequently, these stakeholders place more emphasis on elements related to solvency and liquidity. Employees may not be as concerned with solvency as they are with a firm’s ability to continue to pay wages and benefits. Conversely, these stakeholders may overemphasize the short-term ability of a firm to provide benefits at the cost of its continued viability. Dividend policy, in particular, has implications for staff costs and for labor’s perceptions of the firm’s future prospects and financial condition, although accounting statements currently give staff little direct guidance on this issue.

The product of an accounting process is an accounting statement that has value as a basis for decisions taken by others. For those who are external to an entity, financial statements are a rich source of information, particularly if they are supplemented by other sources of information. Practitioners and scholars recognize accounting as the language of business. One of the principal reasons that external users of financial statements, in particular, make use of such statements is to assess the performance of an enterprise and its financial condition. Users of financial statements do not always understand the intricacies of the accounting process but are able to form opinions regarding the performance of the firm and its financial condition by using these statements. However, concern has been expressed that in many instances users do not completely understand the statements they must use in decision making.

3. Key Financial Ratios and Metrics Used in Salary Benchmarking

3.2 Potential Controlling Factors Evidently, it is very probable that experience, education, competence, and company belonging all have considerable impacts on the remuneration earned. Consequently, when using financial ratios as potential determinants in a wage equation, it is desirable to control for experience, education, competence, and company belonging. This will not only account for potentially important human capital effects, but it will also allow for such effects to be directly related to the financial situation of firms. This may help to explain the often counter-intuitive results that are presented using company fixed effects.

3.1 Combinations of Financial Ratios As has been revealed in the literature, financial ratios generally move together, and it is therefore important to realize that the information contained in the salary-benchmarking exercises is generally lost because either arbitrary weights are used to achieve an overall measure or no attempt to combine the information from different indicators is made at all. Earlier, the use of clusters of financial ratios has been suggested to overcome the problem of coordination. From the literature on wage determination, it is seen that several indicators based on the firm’s financial situation are used. The main indicators used in wage determination are the rate of sales growth, the average rate of return, the profit margin, the beta, the standard deviation of the stock returns, the payout ratio trend of strategies, and the size of the firm.

4. The Influence of Accounting Regulations and Standards on Compensation Policies

The objective of the section is threefold. The first goal is to present the accounting regulations currently ruling in France, the United States, and the United Kingdom. The second goal is to underline the fairly important changes in companies’ accounting practices after periods of crisis. Indeed, these reforms are often the symptom of a political demand for more corporate financial information. The many stakeholders involved in salary determination require the reform of companies’ accounting practices. An understanding of French reforms since 1978 is important to demonstrate how the Act of 26 July 1998 incorporating the IAS will affect French accounting regulations and practices. The last goal of the section is to show the role of different accounting transmitters (standard-setting authority, big six auditors, banks). We estimate that in services instead of goods production an individual’s performance could only be judged after the fact: in this case, there is an agent-principal problem. The output is observable only with a time lag and possibly at high agency cost.

As mentioned in the introduction of this paper, there are many ways in which accounting institutions may influence companies’ salary determination. In this section, we are interested in the legislation ruling companies’ accounting practices in the three countries we consider: France, the United States, and the United Kingdom. Our objective is to present the institutional context in which the accounting function has developed and show the role of the public accounting profession. We also describe the recent trends of companies’ accounting regulations which tend to change their information practices. We are especially interested in current French reforms. After having described the six major accounting functions in large companies and the means by which each of them may be influenced by accounting regulations, we identify the roles of the main accounting transmitters.

5. Case Studies and Best Practices in Aligning Financial Accounting with Salary Structures

In these notes, we make the following assumptions. First, pay costs have gone through substantial change and will continue to do so as varied and responsive cost structures become critical differentials in global competition. Furthermore, much additional and valuable work on pay costs by industry is needed as relative cost position and profile vary widely by industry, and only a small minority of typical companies has taken into account this critical performance factor. Second, unless there is an immediate catalyst (such as margin or other cost position threatened by product price decline – or growth rewarding top or all performers require lower financial and time leverage), the time span between top pay practices and accounting design and operating cost impact changes is substantial.

In general, private sector practices in financial accounting have made – and can make – a significant impact on the design and operation of salary structures. Consider rewarding the best, rewarding activities most needed for success, rewarding individual performance, properly recognizing the needed pay deterrence component, and providing baseline protection for employees against market failure. Recognizing market sensitivity is, we believe, a key element in achieving the best reward and the lowest cost in the way countries’ private sector businesses operate their accounting systems. The generally modest attention paid to this subject in our remarks on practices in cost structure design is critical of “generally accepted accounting principles” – “GAAP”.