Al Kholassss

Final argument stress that principle base accounting will lead to management compensation scheme. The term “compensation” means getting paid for the work that the management does. The work can be as part of full time engagement or part time in nature. What is common to them is that the “reward” that the management gets for the target that they are achieve for the company. As we mentioned in the introduction, the principle base is a general set of accounting standard without specific rule that are set out to ensure a good reporting of financial statement. Management compensation scheme will motivate the manager to achieve the objective and target for the company. Furthermore, management compensation scheme also will improve the company performance because of some incentive that provide by the company to the management such as remuneration plan, bonus payment, and others. It also helps to understand such a relationship and to design the optimal management compensation scheme which induces the manager to act towards the goals and best interests of the company.

Example of management compensation scheme happened when the company target one million of profit for the project that they are involve and will give 5% bonus to the manager if they achieve the target within specific period. This is to give motivation and encourage the manager to act in the best way and achieve the goal. Principle based is broad guideline that will give opportunity for the manager to find the best way to achieve the target, instead of rule base that have specific rule that the management have to follow. According to Chan (1997), the effects of management compensation schemes on the corporate investment decisions. The result from the research said that the manager tends to invest in a less risky project even when the earnings are greater than the investment. This result shows that the manager will not act in the best interests of shareholders regardless of the level of earnings. This finding...