Management

Compensation Trika G.
Adiwibowo

IBS Guest Lecture – Sistem Pengendalian Manajemen

Organizational Compensation
Research Finding
Complaints of Over-Payment

Unnecessary Effect on Compensation Determination

Neglect the Financial Strength of The Organization

Lack of Transparency in Executive Compensation

Unequal Distribution of Income

High Exit Fees

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 Match Managerial Interest with Organizational Interest

Acquire Best Executive

Increase Employee Participation, Commitment, and Motivation

Encourage Managerial Efficiency

Ensure Overall Financial Security

Encourage Progressive Learning

Characteristic of Compensation Plan

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Agency Theory
General Explanation Two Main Problems of Agency Theory

Concentrated on the relationship Conflict of Interest

between AGENT and PRINCIPAL Agents tend to prioritize
(where Managers of the Company their own self interest
act as an AGENT while Shareholders rather than the interest of the
act as PRINCIPAL). principal.

Information Asymetry
AGENT are responsible for making decisions on
behalf of the shareholders and they must exercise There is a gap of
their duty to the best of their ability (being information between agent
and principal (agent has more
accountable) in such ways as to maximise the
information than the
shareholders’ wealth and fulfil their expectations. principal).

IBS Guest Lecture – Sistem Pengendalian Manajemen 06/05/2024 4

Agency Theory – Cont’d
General Assumption Firm’s Agency Cost

Agency theory assumes that the people in the market are Monitoring Cost: cost of auditor to check or verify financial
statements.
rational.

Bonding Cost: compensation/ remuneration costs of board

of director (and/or managerial level).
They tend to make decisions that will enhance their
personal welfare or their personal benefits.
Residual Cost: earning management, fraud or
accounting scandals

Managers tend to be involved in opportunistic behavior

(such as earning management, fraud and accounting scandals)
that potentially increases firm’s agency cost.

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 Compensation
Design &
Strategy

Pay
Philosophies:
NO WORK,
NO PAY

IBS Guest Lecture – Management Control System 06/05/2024 6

Compensation Design & Strategy – Cont’d

Bonus and
Pay Market Base Salary
Incentive Benefit Package
Analysis Setting
Programs

Compensation Total Rewards Performance Cost

Governance Strategy Management Management

IBS Guest Lecture – Sistem Pengendalian Manajemen 06/05/2024 7

Compensation Scheme for Executive
(Remuneration)

01 02 03 04 05 06
Salary Allowance Incentive Festive Bonus Perquisites
(Commission) Allowance (Perks)

IBS Guest Lecture – Sistem Pengendalian Manajemen 06/05/2024 8

 LABEL
PROCEDURE: REMUNERATION DESIGN

Remuneratio Remuneration process Fit? End Process

n Design
Yes

Fine tuning and submit

Define business dan remuneration scheme for
corporate remuneration review and approval from
strategy Executive Draft remuneration
T-3 scheme
T-2
15
Literature reference 60
No
review

Define remuneration Approve?

scheme No
T-3
Yes
15

Define fixed remuneration Implement remuneration

design: salaries, fixed scheme
No
allowances T Approved remuneration
T-3 scheme
Remuneration comitte 45
30 discussion No

Verified?
Fit?

Yes
Remuneration comitte
Define variable
remuneration design:
benefits, variable
allowances, incentives,
facilities and performance
T-3
bonus
30
Yes
discussion
Softfile Data on Main Procedure
HRM Database Secondary Procedure
T Implementation Day
Estimate Time Process in Number of Days
T-2 Before Implementation (-) or Days After
Implementation (+)
45 Estimate Time Process in Minutes

IBS Guest Lecture – Management Control System 06/05/2024 9

FIN

IBS Guest Lecture – Management Control System 06/05/2024 10