the effect of monetary incentive on effort and task performance a study of vietnamese company

THE EFFECT OF MONETARY INCENTIVE ON EFFORT AND TASK PERFORMANCE: A STUDY OF VIETNAMESE COMPANY In many Vietnamese companies, incentive systems are designed to motivate employees at work

DECLARATION OF ORIGINALITY AND WORD COUNT

I hereby declare that the graduation project is based on my original work except for quotations and citations which have been duly acknowledged I also declare that it has not been previously or concurrently submitted for any other course/degree at Help

University College or other institutions The word count is 14,056 words

NGO THI KIEU VUI

October, 2011

ACKNOWLEDGEMENT

First at all, I would like to express my sincere thanks to my project supervisor, Dr Le Van Lien, International School, Vietnam National University Hanoi for guidance and encouragement in carrying out this project work

Great deals appreciation goes to Ms Sumathi, Help University College, who initiated and gives me much instruction and support about the dissertation

My sincere thanks to the collaboration of Mr Nguyen Xuan Luat_ Director of

VIETCOMBANK, and Ms Phung Nguyen Hai Yen_ Chief Accountant of

VIETCOMBANK, have spent time to help me in my interview

I also wish to express my gratitude to Vietnamese teachers at International School and the Malay teachers at Help University College who taught and helped me during the study process at the International School Thanks to my foreign friends especially those who work with me during my study time Not forget, great appreciation go to teachers and friends who have worked closely with me throughout my five of study at the

THE EFFECT OF MONETARY INCENTIVE ON EFFORT AND TASK PERFORMANCE: A STUDY OF VIETNAMESE COMPANY

In many Vietnamese companies, incentive systems are designed to motivate employees

at work and attract new talented candidates Monetary incentives are considered as the most powerful motivational tool in such systems The companies originally use

monetary incentives for the purpose of encouraging their employees to perform in the most effective way However, in practice, the effectiveness of using monetary incentive

to encourage them is still controversial among the researchers In the accounting field, managers and accountants play important roles in preparing a complete financial

statement How to encourage them to make the true and fair financial statements is very important to various parties in a company The purpose of this research is to find out the real effect of monetary incentive in the workplace, especially its effectiveness on

motivating managers and accountants in providing the true and fair financial statement and performing other tasks in the company

TABLE OF CONTENTS

DECLARATION OF ORIGINALITY AND WORD COUNT 1

ACKNOWLEDGEMENT 2

ABSTRACT 3

TABLE OF CONTENTS 4

LIST OF FIGURES 7

LIST OF ABBREVIATIONS 8

1 INTRODUCTION 9

1.1 Background of study 9

1.1.1 Monetary incentive in the world 9

1.1.2 Monetary incentive in Vietnam 10

1.1.3 Accounting scandal involved in monetary incentive 11

1.2 Scope of research 12

1.3 Problem statements 13

1.4 Hypotheses 14

1.5 Organization of research 15

2 LITERATURE REVIEW 17

2.1 Issues related to monetary incentives 17

2.1.1 Motivation 17

2.1.2 Monetary incentive 19

2.1.3 Arguments for monetary incentives 21

2.1.4 Arguments against monetary incentives 22

2.2 Review of accounting theories related with monetary incentives 23

2.2.1 Adams’ Equity Theory 23

2.2.2 Bonus schemes 26

2.2.2.1 Accounting-based bonus plans 27

2.2.2.2 Market-based bonus schemes 30

2.2.3 Agency Theory 31

2.2.4 Possitive Accounting Theory 34

2.2.4.1 Three key hypotheses of Positive Accounting Theory 35

2.2.4.2 Opportunistic perspective 36

3 RESEARCH METHODOLOGY 39

3.1 Research objective 39

3.2 Data source 40

3.2.1 Secondary data 40

3.2.2 Primary data 41

3.3 Research method 41

3.4 Research tool 42

3.4.1 Questionnaire 42

3.4.2 Personal interview 43

3.5 Data collection 43

3.6 Sampling 44

3.6.1 Sample population 44

3.6.2 Sample frame 44

3.6.3 Sample size 44

3.6.4 Sample techniques 44

3.7 Limitations 44

4 FINDINGS AND ANALYSIS 46

4.1 Test for Hypotheses 48

4.1.1 Hypothesis 1 48

4.1.2 Hypothesis 2 50

4.1.3 Hypothesis 3 51

4.2 Overall discussion from questionaire survey 53

4.2.1 Purpose and motivation at work 53

4.2.2 Imbalance between monetary incentive and input 56

4.2.3 Opportunism in work 59

4.3 Overall discussion from managers and accountants interviews 61

5 CONCLUSION 65

REFERENCES 68

APPENDIX A: QUESTIONNAIRE 78

APPENDIX B: STATISTICAL TEST 81

LIST OF FIGURES

Table 4.1 Classification of the Respondents from Different Sector 46

Table 4.2 Classification of the Respondents from Different Gender 46

Table 4.3 Classification of the Respondents of Different Age Group 47

Table 4.4 Respondents’ purpose and motivation at work 49

Table 4.5 Imbalance between monetary incentive and input 51

Table 4.6 Opportunism in work 52

Figure 4.1 Classification of the Respondents from the Length of Employment 47

LIST OF ABBREVIATIONS

EMH Efficient Market Hypothesis

FD Financial Director

GAAP Generally Accepted Accounting Principles

IAS International Accounting Standard

NPV Net present value

PAT Positive Accounting Theory

R&D Research and development

VAS Vietnamese Accounting Standard

1 INTRODUCTION

1.1 Background of study

1.1.1 Monetary incentive in the world

Monetary incentives have been known as a motivation tool and have been used in many companies in the world many years ago The most popular forms of monetary incentive are bonus and share options Since 1929, Bethlehem Steel was the second-largest steel manufacturer in the US Eugene G Grace, President of Bethlehem Steel, was rewarded a

$1.6 million bonus He became the first million-dollar man at a public company

(Business Week, 1999) In the history, the success of many large companies usually records a large amount of monetary incentive to be paid for the board of management This result has been shown in many surveys conducted by Business Week Magazines, Financial Director (FD) Magazines

In 1997 Business Week’s annual executive pay survey, Coca-Cola provided Roberto Goizueta, CEO of Coca-Cola, a total of $111.8 million which consisting of annual salary, bonuses, and long-term compensation This was also one of the most well-paid monetary incentive packages in the history of public companies However, Coke’

shareholders were very happy with such incentive package It could be said that the whole life of Goizueta devoted to Coca-cola during his 16 years reign, he has made great contributions to the company Coke’s stock increased at an amazing 3,800 per cent (Roger Martin) In the same year, top executives of nearly half of the 200 largest

companies were awarded a large number of options that worth at least $10 million In

addition, according to 2005 FD salary survey, Kevin Hayes, FD of Man Group_ a world leading alternative investment management business, ranked no 1 in FTSE-100 FD pay league with a total pay of £2,359,000 including £310,000 salary, £2,000,000 bonus and

£49,000 others (Financial Director, 2005) Hayes’ bonus was even much higher than his basic salary In these cases, the success of these companies was based on the fact that monetary incentive has played an important role in encouraging the board of

management on performance

1.1.2 Monetary incentive in Vietnam

Nowadays, with the widespread use of monetary incentive, almost all Vietnamese

companies have set up bonus and welfare funds to reward their employees while the Vietnam law on Enterprises (2005) does not oblige the companies to set up such funds Many companies have used monetary incentives as a good starting point to encourage their employees’ performance and they have seen monetary incentive as a good

motivational tool to improve their employees’ behavior Within companies, managers and accountants are often the most important people in performing financial statements Many companies have rewarded them based on the result of the financial reports That means if there are high reported earnings; they could be rewarded high bonuses or more number of share options The use of monetary incentive is expected to increase their effort in performing the true and fair financial statement However, monetary incentive might motivate them in choosing accounting methods, which bring the best interest for them, but not for the company

In Vietnam, there are not many surveys conducted as what has been done by Business Week and Financial Director In addition, it is very hard to find sufficient information which involves managers’ and accountants’ monetary incentive because there are only a few companies voluntarily declared and the Vietnamese Accounting Standard Board (VASB) does not require the company to disclose such amounts (Vietnamese

Accounting Standard) Only one thing that can be easily recognized is that managers are often rewarded more than the direct labor of many workers in many companies This can

be explained by the fact that managers often have to work harder, have to have more achievements, more influential, more dedication for the company Therefore, it is very difficult to evaluate their’ performance, and the link between monetary incentive and their performance

1.1.3 Accounting scandal involved in monetary incentive

In history, there were many accounting scandals in the world This study will mention a typical scandal involved in monetary incentives in the accounting history That is the case of Nortel Networks Corporation Since 1895, Nortel Networks

Corporation was a Canadian multinational telecommunications equipment manufacturer Then, it has rapidly grown into a global leader in delivering communications capability (Corporate website) However, it was involved in the worst telecom meltdown in the history when it announced a loss of $2.2 billion for the last quarter of 2005 On 2 July

2007, a Wall Street Journal reported that Nortel manipulated its books by misusing accrued liabilities to boost profit earnings (Wojtek Dabrowski, 2008) Many of Nortel’s executives have been charged by U.S regulators for engaging in accounting fraud They

manipulated Nortel’s books to meet Wall Street’s expectations, and pay themselves high

level of bonuses “Nortel's earnings management fraud could not have happened

without their efforts These defendants all received significant compensation while they

were falsifying Nortel's financial results”_ Christopher Conte said_ an Associate

Director of the Commission’s Division of Enforcement (U.S Securities and Exchange Commission, 2007) It was believed that the cause of this scandal was Nortel’s board put a too powerful monetary incentive package for its leaders into place If Nortel

reached break even point for the first quarter, the management team would be rewarded US$13.6 million and US$30 million for three consequence quarters This drove senior management to intentionally under-report income in 2002 in order to ensure to break even in 2003 Due to the intention of management, 2003 was a break-even year and Nortel’ CEO and CFO were rewarded a huge amount of bonuses in cash and stock Frank Dunn, one-time CEO, sacked $2.15 million CFO Douglas Beatty got $831,000

In 2003, Nortel had to pay US$10 million for managers’ bonuses It is clear that

monetary incentive had motivated management in manipulating accounting information Therefore, Nortel had not used monetary instruments effectively in encouraging

managers to product the true and fair accounting information

1.2 Scope of research

This study focuses on the effectiveness of using monetary incentives in motivating effort and task performance However, this thesis on the effect of monetary incentives on effort and task performance of every worker seems more like a thesis for social science major This thesis must satisfy all the requirements for the degree of Bachelor of Accounting In

addition, in accounting field, managers and accountants can be considered as the most important people who influence the financial reports Therefore, the scope of research will be limited by only researching on effort and task performance of managers and accountants in Vietnamese companies In addition, there is a close relationship among them because accountants are people who directly prepare financial statements;

managers are people who take charge of choosing accounting methods for their

company It is very hard to separate the role of managers and accountants in performing financial statements This study will consider managers and accountants to be a unique entity and these names are interchangeable in the study

1.3 Problem statements

There are many problems involved in utilizing monetary incentives to motivate

employees in Vietnamese companies The following research questions are tried to address the effect of monetary incentive on effort and task performance:

 Do all Vietnamese companies have reward funds to motivate accountants and managers?

 Which circumstances can the companies use money to motivate managers and accountants on effort and task performance?

 What happens if monetary incentives are not parallel with managers and accountants’ effort?

 What are the types of monetary incentive that can motivate managers and accountants the most?

 Should monetary incentives always be used to motivate employees on effort and task performance in today’s working environment in Vietnam?

H1: Regardless of how much monetary incentive, when there is an opportunity,

managers and accountants will act opportunistically

H0: Regardless of how much monetary incentive, when there is an opportunity,

managers and accountants will not act opportunistically

1.5 Organization research

The studies are into five chapters with different objectives as following:

Chapter I: Introduction

In this chapter, the study provides a general picture about the relating topic In

particular, it gives introductions about monetary incentives, main objectives of the study and problems involved in the application of monetary incentive in Vietnamese

companies

Chapter II: Literature review

This chapter concentrates on explaining all concepts and theories related to the topic Thus, this chapter focuses on explaining all the issues and the main theory relates to monetary incentive

Chapter III: Research methodology

This chapter describes all techniques and strategy used to conduct the research such as data source, research tools, and data collection This chapter also mentions to some difficulties when the researcher conducts the study

Chapter IV: Findings and analysis

This chapter shows all findings from the collected data after conducting survey related to topic And then, the chapter mainly focuses on analyzing all the collected data The collected information is very necessary to investigate the effect of monetary incentive on task and effort performance of managers and accountants

Chapter V: Conclusion

This is the final chapter in the study The main duty of this chapter is to sum up all the results from the study

Nowadays, it is a concerning issue of almost all companies and a difficult subject in the workplace Although it is very difficult to define this concept rigorously, there are still various definitions on this concept

Motivation can be referred to as “the act of stimulating someone or oneself to get a desired course of action to push the right button to get a desired reaction, a compliment,

dollar raise, a smile, a promise of a rise, a new typewriter, a preferred location or a new

desk” (Michael L Jucius); “the psychological process that gives behavior purpose and direction” (Kneitner, 1995); “give reason incentive, enthusiasm, or interest that causes

a specific action or certain behavior” (Wenday Pan, 2008); or “a set of forces that

directs an individual to the behavior that results in better job performance” (Ashim

Gupta, 2011) Two main kinds of motivation are intrinsic and extrinsic Intrinsic

motivation (non-financial incentive) comes from within the individual, not from any outside pressure, such as public recognition or feelings of achievement It is driven by enjoyment and pleasures of completing a task Adversely, extrinsic motivation (financial

incentive) occurs when external factors attract employees to work, for example,

monetary incentives or punishment

Motivation brings advantages to both the company and employees If an employee is

highly motivated, motivation will be converted to “probably work harder, produce a higher quality of work and be less liable to take time off” In addition, it helps to “avoid

clashes and non-cooperation and brings harmony, unity and co-operative outlook

among employees” (Gauray Akrani, 2010) As a result, the company can increase the

efficiency and productivity of employees which lead to increase profitability For the employees, they can get various benefits, such as monetary and non-monetary facilities

in exchange for their efforts In 1955, Elton Mayo had conducted the Hawthorne

Studies from 1924 to 1932 (James R Lindner, 1998) The results of these studies help

us to understand what motivated people at work; and how they were motivated In almost all companies, motivational techniques are very useful to leaders, employers and other managers Management can consider motivation as a key role in leadership

success

According to Walter, motivation is also the most important factor of performance

(Walter Jack Duncan, 1998, p438) Many evidences show that enhancing motivation will lead to promote performance (McCullage, 2005; Wilson, 2005) Moreover,

motivation is the most fundamental factor for workers to stick with the job and do a better job In the human resource management, motivating employees to work on high effort is one of the most important issues In the accounting field, motivating managers and accountants in choosing accounting policies that bring the best interest for the whole company is the most important one When the issue is motivation, companies need to

motivate managers and accountants on higher performance For owners, they should be especially aware of the importance of motivation because only if they understand the importance of it, then can they implement incentive policy to motivate their employees

at work In addition, managers also need to think about what motivates them to work because most people have to work with high pressure throughout their life

2.1.2 Monetary incentive

An incentive in anything can be referred to as a motivation for doing a particular course

of action It makes managers as well as other employees desirous to do better, try harder

and expend more energy Vaida (2003) stated that “incentives are used to reward outstanding performance and to sustain efficiency in work processes” In the companies,

they usually offer incentive systems as an important part of the companies’ motivation These systems are usually used as the way to reward staff In many cases, incentive systems are also used for the purpose of correcting and preventing the employees’ mistakes in term of penalties, fines and other punishments However, the systems can encourage or discourage their employees up to their ability in designing these systems

A good incentive system can encourage employees to work harder, produce more

efficiency and foster loyalty to the company

Monetary incentive is a type of incentive and used as a motivation tool The companies offer monetary incentive to all categories of workers in terms of rewarding money in exchange for their desired performance In general, monetary incentive is paid in

addition to basic wages or salary It may be further divided into two categories:

individual monetary incentive and group monetary incentive Individual monetary

incentive means that individuals are paid “based solely on the performance of the

individual employee” (Judith, 2001) F.W Taylor suggested a good example of the

individual monetary incentive which is different incentive wage plans Different

employees have different ability in production Therefore, they are paid different

incentive wages as per their production efficiency As for managers and accountants, they hold important positions in a company Their responsibility is often higher than other employees They also have to work on higher effort than others This also means the company should pay them different monetary incentives than others Moreover, if managers want to be paid more monetary incentive, they need to work more efficiently and productively than others With group monetary incentives, the monetary incentive is given to a group of employees or to all employees in the company Some typical

examples of the group monetary incentives are bonus payment, profit sharing, pension funds Rewarding managers as a group will motivate them to cooperate with other employees to accomplish the company’s goals Furthermore, this also motivates

managers to act in the best interest of the company For the company as a whole, group monetary incentive brings many benefits However, because performance is evaluated over the group’s performance, the owners will have less control over each manager’s performance In many cases, managers may work less effectively and productively than they are paid individual monetary incentives (Blinder, 1990; McCoy, 1992)

Bonus is a typical example of monetary incentive It can be defined as “compensation for employees for work performed, they are paid in addition to salary or wages” (Jean

Murray, 2011) Within companies, owners consider bonus as the most effective

rewarding tool to strike the balance between the effort that managers put into work and

what they deserve from the company In addition to rewarding workers for their effort in doing a good job, bonus plays an important role in encouraging them and creating

incentives for them to provide the true and fair view in the financial statements

However, with managers as well as other employees, they have to pay tax for bonuses For companies, they will benefit from tax payments when these amounts are treated as

an expense of doing business So, the companies tend to reduce salaries and increase bonuses to promote performance Bonus is often similar in almost all companies because they are used to measure how well a person is doing with respect to the owners’

expectation and how well a company is doing with respect to its expectation

2.1.3 Arguments for monetary incentives

In the 21st century society, many people believe that money can help to resolve most problems and purchase many things depending on the sum of money in possession Therefore, may people believe that monetary incentive can affect their behavior In the company, monetary incentive is the simplest and easiest technique to motivate workers Proponents argue that monetary incentive also brings many benefits when it affects managers’ behaviors and provides a strong incentive for managers to attain the

company’s goal Numerous studies have demonstrated that monetary incentive is a useful technique to increase motivation and thus performance (Guzzo, Jette, & Katzell, 1985; Locke, Feren, McCaleb, Shaw & Denny, 1980) Each person has different

motivation for working and especially, no one works for free Some people work for love, fun, personal fulfillment, or fill up their free time with activity Whatever any

personal reason that may be, almost everyone work for money “The invisible hand” of

Adam Smith described the idea that people act on behalf of their own self-interests to promote the public good (Peter Mork, 2004) That also means they work to serve their self interest and are presumably motivated by money Basic needs motivate them to works for basic salary and monetary incentive might motivate them on better effort and task performance Smith showed that highly rewarding economic activities will affect directly on one’s own self-interest and also maximize the economic well-being of

society Smith believed that monetary incentive will bring several benefits to the

company when it motivates employees on higher level of performance Thus, monetary incentive is a good motivating tool in business

2.1.4 Arguments against monetary incentives

In purpose, monetary incentives have been used to reward employees for desired

behavior and good performance However, monetary incentives do not always achieve the positive effect in a business In some cases, they create some problems There are many arguments against the use of monetary incentive at work In the article “Why

Incentive Plans Cannot Work” in 1993, Alfie Kohn argued that “rewards succeed at securing one thing only: temporary compliance” He indicated that at least two dozen

studies showed a complete opposite result with the purpose of using monetary incentive Monetary incentives may encourage employees to perform in a particular way to achieve monetary reward but do not encourage them to do the right things As a consequence of this issue, monetary incentives may drive employees to be involved in unethical actions For example, in order to increase bonuses, an accountant intentionally falsified data

numbers to increase reported profits Furthermore, many researchers such as Bahrick (1954); Deci (1971); McGraw (1978); Gneezy and Rustichini (2000); Heyman and Ariely (2004) also argued that monetary incentive leads to poorer performance Cynthia

Hartman (2011) suggested that “non-monetary incentives are proving themselves as much more effective tools in the workplace” To improve work environments, non-

monetary incentives, such as flexible work schedules, pleasant work environment, will

be better to keep employees staying with the company in the future

2.2 Review of accounting theories related to monetary incentive

Each group of person is motivated by different things By reviewing the accounting theories, they will help to understand what motivates accountants and managers to generate higher energy in work and why they involve in actions that go against the company’s best interest

2.2.1 Adams’ Equity Theory

John Stacey Adams developed Adams’ Equity Theory_ job motivation theory_ in 1962

(Matt, 2009) “Adams’ Equity Theory calls for a fair balance to be truck between an employee’s inputs (hard work, skill level, enthusiasm, and so on) and an employee’s outputs (salary, benefits, intangibles such as recognition, and so on)” (“Adam’s Equity

Theory”, 1996) The theory explains how managers as well as other employees judge the fairness of rewards with their effort put into work (McShane et al 2000, 79.) Many

researchers evaluate this as one of the best theories that explain the necessity of balance between input and output in motivating task performance

Adam’s Equity Theory is considered as one type of the justice theories The equity is calculated based on the ratio of outputs over inputs Adams suggests that in order to achieve equity, work effort must be equal to work reward, or the equity ratio of one’s is equal to others as the following equation:

)(

)()

(

)(

Other Outcomes

Other Inputs

Individual Outcomes

Individual Inputs



Inputs are everything or all investments that a person puts into work Typical examples

of inputs are effort, ability, hard work, flexibility, loyalty and so on Outputs are what a person takes out in return and equal reward minus cost They can be financial rewards such as monetary incentive, and non-financial rewards such as recognition, growth In order to receive an outcome such as bonuses and share options, the employee has to first put investments into work such as time and effort Adam believes that if outcomes are less than inputs, workers will seek equilibrium in the form of reducing effort, requiring a pay rise In the case of over-rewards, employees may fell compelled to work more effectively and productively In such two cases, employees will become de-motivated Only if workers are rewarded equally to their contributions, they will be motivated the most Moreover, workers usually tend to make comparisons They compare their

outcomes over inputs with others If they feel that their receipts are equal to what others receives for same inputs, they believe that the treatment is equitable and adversely, they will transform to higher effort on task performance Therefore, the study of Adam

showed that the equity or the balance between input and output is very necessary to

motivate workers in the workplace If a worker feels that he/she is treated unequally, he/she may be de-motivated

Going along with the study of Adam about the balance between input and output, there are also many researchers who conducted similar studies such as Vroom’s Expectancy Theory (1964), Skinner’s reinforcement theory In 1964, Vroom’s Expectancy Theory was developed by Victor Vroom of Yale School of Management The theory assumes

that people will make decisions among various choices based on “their perceptions [expectancies] of the degree to which a given behavior will lead to desire outcomes”

(Isaac Ramoloko Mathibe, 2008) According to Vroom, individuals’ performance

depends on individual factor such as one’s skill, knowledge, experience and ability There is a positive correlation between performance and reward If good performance is rewarded, reward will satisfy workers on their effort and then drive performance Next, Reinforcement Theory of motivation was developed by BF Skinner and his associates It

states that individual’s behavior causes consequences The theory concentrates on “what happens to an individual when he takes some action” The reinforcement tools will help

to control the behavior of a person For example, Positive Reinforcement is rewarding the individual when he/she shows positive consequences and desired behavior Negative Reinforcement is the result of withholding an undesirable behavioral consequence If employers realized that their employees behave in the desired manner, employers will stop criticizing or punishing them In short, the balance between input and outcome is very important in motivating effort and task performance

between their input and output to motivate them on performance Many researchers advocate use accounting-based bonus rather than market-based bonus plans In these schemes, managers and accountants are rewarded based on the output of accounting system Deegan (1997) listed many accounting performance measures used as a basic for rewarding managers For example, bonus is calculated based on percentage of after-tax profits of the previous year, percentage of after tax profits after adjustment for dividends paid, percentage of pre-tax profits for the previous year, percentage of division’s profit for the previous year or percentage of division’s sales for the previous year (Deegan,

2006, p.279) On the other hand, many other researchers argue that market-based bonus schemes will be better in aligning managerial and shareholder interests This study will show the role of both accounting and market mechanisms in reducing the agency

conflict

2.2.2.1 Accounting-based bonus schemes

Accounting-based bonus plans can be defined as an incentive plan based compensation program to award managers and accountants a percentage of the company’s accounting profit Proponents of accounting-based bonus plans have demonstrated the common usage of it in many companies Towers Perrin (1996-1997) had conducted a survey of

177 publicly traded U.S companies; the research showed that 161 out of 177 companies used at least one measurement of accounting profits in their annual bonus plans The study of Larker and Rajan (1992-1993) also showed that 312 out of 317 U.S companies used at least one financial measurement in their annual bonus plans (Deegan, 2006, p 279)

The widespread use of this bonus schemes is explained by Emanuel, Wong and Wong (2003, p 155) First of all, accounting earning is a simple and more effective way to measure the performance of managers and accountants than other measures such as share price and realized cash flow In particular, they argue that many companies do not have a listed share price The share price is usually fluctuation The price is affected not only by actions of managers and accountants but also by external factors Therefore, managers and accountants will be less capable to control these external factors With realized cash flow, it does not reflect a timely measure of performance of them

Accounting earning is one of the good measure instruments because their’ effort is directly tied to accounting earnings So they are used as the basic for calculation of manager’s contractual pay-off They are also the basic to determine the reward and punishment for their’ performance The managers’ and accountants’ remuneration package will include fixed base salary plus percentages of accounting profits In this

way, they will be interested in performance to raise accounting profits On the other hand, accounting-based bonus plans can be a good mechanism that aligns the managers’ and the owners’ interest Higher accounting earnings lead to higher reward for

managers If managers and accountants feel the balance between their effort and bonus,

in the long term, they will no longer practice opportunism to increase their wealth They will act in the interest of the company

Accounting-based bonus plan is a form of a variable pay plan because managers and accountants will receive bonus only if the company has profit The purpose of

accounting-based bonus is to motivate them to improve profits and act in the best

interest of the company At the same time, company also hopes that they will be

motivated in task performance when they share the company’s success Furthermore, it will drive groups of employees to work in pursuit of the common goals It also helps to ensure that all employees focus on profitability that is the reason of the existence of the companies

However, opponents of this bonus schemes indicates many disadvantages for the

company In many cases, the researchers show that if bonus is calculated based on accounting earnings; this may induce managers and accountants to manipulate the related accounting numbers to maximize their bonus This is also proven in the study of Healy (1985) He found that in order to maximize bonus, the managers will adopt

accounting methods that increase the current reported profits They can shift the future reported earnings to the current period to increase bonuses for the current year

However, in some situations, where the profit cannot meet the minimum level required

by the bonus plan, managers will tend to apply strategies to reduce income in that period

to higher income in subsequent periods Only if accounting profits are higher than the minimum level, managers will receive bonuses Furthermore, Lewellen, Loderer and Martin (1987) showed that the retiring managers did not want to undertake the research and development (R&D) expenditure Under US generally accepted accounting

principles (GAAP), R&D expenditures are immediately treated as expenses (Cheng,

2004, p.307) If they undertook such expenditure for that period, this would reduce accounting profits and led to reduce their bonus They would not share gains (bonuses) for their effort in that period In addition, Gibbons and Murphy (1992) indicated that the managers approaching retirement are concerned with short-term operations rather than long-term, therefore, they become more short-term oriented Thus, they usually tend to reduce R&D spending although it was expected to raise profit for the company in the subsequent years As a result, the future value of the company may be detrimental Besides, DeAngelo (1988) provided evidences that not only the managers who are approaching retirement but also managers who are feeling that their position is being shaken will adopt accounting methods that increase the reported profits

So, infrequent use of accounting-based bonus schemes is also effective in bringing balance between input and output Sloan (1993) indicated that offering managers

bonuses that were tied to accounting earnings in those companies where:

 Share returns are relatively more sensitive to general market movements (relatively noisy);

 Accounting earnings have a high association with the firm-specific movement

in the firm’s share values;

 Accounting earnings have a less positive (more negative association with market-wide movements in equity values (Deegan, 2006, p.286)

2.2.2.2 Market-based bonus schemes

Market-based bonus schemes refer to the bonuses that are tied to share prices, which reflect information from various sources The proponents argue that the use of market-based bonus schemes is a better way to align managerial and shareholders interest These schemes will better measure managers’ effort in some cases Firstly, in the

Efficient Market Hypothesis (EMH), the public accounting information is expected to be quickly impounded into share prices If a manager has any signal in an opportunistic manner (i.e changing accounting methods) and the market is efficient, the market will immediately question the managers’ integrity Therefore, under this view, the managers cannot act opportunistically to manipulate the share prices Secondly, there are many companies that have accounting earnings fluctuating greatly such as mining or high-technology research and development firms For such companies, they should apply market-based bonus schemes rather than accounting-based bonus schemes

According to the research of Lewellen, Loderer and Martin (1987), the managers

approaching retirement should be rewarded in terms of market-based bonus schemes Instead of being rewarded by cash bonus based on accounting earning, they are

rewarded in term of share options That means that they have rights to buy the

company’s shares Share option is more effective with employees at the high level of management, especially managers and executives Because this is the mechanism that

allows managers to directly engage in the ownership of the company In addition, this can be an effective way to tie the managers’ performance with the best interest of the company In the case of managers approaching retirement, if they put the research and development expenditure in place now, the firm’s shares can increase in several years after their retirement That also means they still have benefits even when they are no longer working for the company Their bonuses are tied to the long-term investments rather than short-term one This will give an incentive for the retiring managers

investing in R&D if they feel the balance between input and output By this way,

market-based bonus schemes motivate managers not only to perform in the company’s interest but also to remain good relationship with the company In this case, both

managers and owners have benefit or their interests are aligned Thus, the survey of Deegan (1997) showed that 21 percent of the Australian managers hold shares in their owners

2.2.3 Agency Theory

Jensen and Meckling developed Agency Theory in a 1976 publication The theory is a key to explain and predict managers’ choice of accounting policies It focuses on the relationships between various groups within a company such as owners and managers, managers and shareholders

These complex relationships are called “Agency Relationship” The agency relationship arises where there is “a contract under which one or more (principals) engages another person (the agent) to perform some service on their behalf which involves delegating

some decision making authority to the agent” (Deegan, 2006) Because the separation

among stakeholders, it leads to conflicts of interest among these groups Both manager and accountant are hired to perform some specific duties in the company All of them are utility maximizes; therefore, there is no ground to believe that they will act on the interest of the company On the other hand, it is not easy to mediate these relationships

If there is not any mechanism to reconcile these complex relationships, it will lead to many problems

The conflicts of interest among stakeholders will never end The agency problem

(conflicts of interest, incentive problems) always exists in the agency relationship According to Lambert (2001), he stated four typical reasons of conflicts of interest They

include “(i) effort aversion by the agent, (ii) the agent can divert resources for his private consumption or use, (iii) differential time horizons, or (iv) differential risk

aversion on the part of the agent” “The agency problem that arises is the problem of

inducing an agent to behave as if he or she were maximizing the principle’s welfare”

(Godfrey, 2010, p362) The separation between shareholders’ and managers’ interest leads to a number of specific problems such as “the risk-aversion problem, the dividend-retention problem and the horizon problem” (Godfrey, 2010, p366)

The risk-aversion problem happens because the managers prefer less risk than the

shareholders The shareholders can diversify their investment portfolios by investing in a variety of firms, but the managers cannot because the Article 116 imposes that managers shall not be managers of another enterprise at the same time If the managers do not perform well, they will be paid less or even lose job which affects their wealth As a result, managers usually prefer to invest in less risky, lower net present value (NPV)

projects Next, the dividend-retention problem occurs when managers prefer to pay out fewer dividends than the shareholders’ expectation It is because the managers want to retain money to pay for their own salaries and other benefit Moreover, they want to increase the size of the company as well as increase their power in the company Last

but not least, the horizon problem arises from “a difference in the time horizon interests

of shareholders and managers with respect of the firm” The shareholders are

theoretically interested in the cash flow of the company until they are no longer holding the company’s shares while the managers are only interested as long as they intend to stay with the firm When the managers approach retirement, they will take more care on the short-term profitability At this time, they want to create a good impression on their performance by reporting higher profits This reason urges managers to choose

accounting methods that can increase profitability

If there is no mechanism that restricts managers’ actions involved in the three problems stated above, they will have incentives to act against the shareholders’ interest Godfrey (2010) had listed some contractual means of motivating managers to act in the interest of the shareholders All of such means are mainly monetary incentive as following:

 Providing “a bonus plan where the upper limit of the bonus partially depends on the firm’s dividend payout ratio”(to reduce the dividend-retention problem)

 Paying “managers more on the basis of share price movements as the manager approaches retirement” (to reduce the horizon problem)

 Paying bonuses at a progressive rate as reported profits increase (to minimize the risk-aversion problem)

 Remunerating managers less with share-based compensation as the manger’s ownership in the firm increases (to reduce the risk-aversion problem)

2.2.4 Positive Accounting Theory

Positive Accounting Theory (PAT) is one typical example of positive theory of

accounting Watts and Zimmerman had developed and popularized the concept of PAT based on the development of Jensen and Meckling (1976) about the Agency Theory

According to Watts and Zimmerman (1986, p7), PAT “is concerned with explaining accounting practice It is designed to explain and predict which firms will and which firms will not use a particular method…but it says nothing as to which method a firm should use”

PAT is based on the assumption that managers’ choice of accounting methods is driven

by self-interest and they will act in an opportunistic manner to increase their wealth (Deegan, 2006) The theory concentrates on the relationships between stakeholders, such

as managers and owners, or managers and creditors, who involve in providing resources

to a company and how accounting is used to reconcile these complex relationships The notions such as loyalty, morality are not existed in this theory Therefore, because

managers’ actions are driven by self-interest, the use of an accounting method and the disclosure of particular accounting information would only occur if it had positive wealth implications for the management involved

2.2.4.1 Three key hypotheses of Positive Accounting Theory

After 10 years of development of PAT, in the article “The Accounting Review”, Watts

and Zimmerman identified three key hypotheses including the bonus plan hypothesis, the debt hypothesis and the political cost hypothesis which had been frequently used in

the PAT literature to explain and predict whether managers would adopt a particular

accounting method

The bonus plan hypothesis predicts that “managers of firms are more likely to use

accounting methods that increase current period reports income” (Deegan, 2006) When

reported income increases, the present value of bonuses will also increase This

hypothesis assumes that if managers are rewarded basing on a measure of performance such as accounting earnings, they will tend to choose accounting methods to increase profits that lead to increase their bonuses

The debt hypothesis predicts that “the higher the firm’s debt/equity ratio, the more likely managers’ uses accounting methods that increase income” When the debt/equity ratio

is high, the company is in the constraints of the debt covenants Managers will be very careful in the choice of accounting methods to reduce the burden of the company’s debt

In this case, managers will have incentive in adopting accounting methods that increase reported income and assets to relax debt constraints

The political cost hypothesis predicts that “large firms rather than small firms are more likely to use accounting choices that reduce reported profits” With large firms, size is a

proxy variable for political attention If they earn high profit, they will attract media, investors, and especially political scrutiny When they face with the greater political cost

(such as tax, regulation), they trend to reduce reported profits Managers are more likely

to choose accounting methods that reduce reported earnings by deferring reported

earnings from current to future periods

2.2.4.2 Opportunistic Perspective

In 1960s, the development of PAT related to the development of Efficient Markets

Hypothesis (EMH) EMH refers to “the assumption that capital markets react in an efficient and unbiased manner to publicly available information” The share prices

reflect all available information in the market There is no need for financial disclosure because the results of financial statement have already been anticipated by the market Watts and Zimmerman (1986) argued that if the market was perfect, there was no need for the accounting regulation At that time, the managers cannot act in an opportunistic manner when selecting the different accounting methods This also means there is no conflict among agency and contracts between managers and owners are unnecessary However, if the market is imperfect of information and agency conflicts, it leads to the appearance of an opportunistic perspective adopted by PAT research

Within the opportunistic perspective of PAT, it “takes as given the negotiated

contractual arrangements of the firm and seeks to explain and predict certain

opportunistic behaviors that will subsequently occur” The opportunistic perspective is also known as ex post perspective “It considers opportunistic actions that could be undertaken once various contractual arrangements have been put in place” (Deegan,

2006, p275) When the managers act opportunistically, they have incentives to choose

accounting policies and manipulate the accounting numbers which will give them the best benefits Therefore, the contractual arrangements help to overcome this problem These contracts are assumed to be put in place to save agency costs However, it will never reach a perfect contractual arrangement So it is assumed that managers will always have a scope to be opportunistic They will act in the opportunistic manner to maximize their own wealth In particular, they will choose the accounting methods that increase accounting profits that eventually leads to increase bonus This explains why profits and assets are significantly overstated Under this perspective, PAT also assumes that owners can predict a manager to be opportunistic Hence, the owners often stipulate the use of accounting methods in some cases For instance, in order to calculate income

to determine bonus, the managers have to use straight-line amortization method But this

is also not a comprehensive solution to this problem It will be very costly for owners to prevent all disadvantageous situations in advance As a result, once again, managers will have a scope to be opportunistic to select the particular accounting methods in preference

In short, opportunism perspectives in the PAT literature help to demonstrate that there is

a close relationship between PAT and monetary incentive or managers’ choice and monetary incentive PAT has made a significant contribution to understand the choice of managers among accounting methods According to Beattie (1994), he explained that managers’ choice is trade-off between the various incentives That choice is very

important in terms of determining the reported profits of the company PAT assumes that managers will choose accounting methods that can maximize their financial wealth This means PAT has ignored all non-financial aspects, financial aspects or monetary

incentive creates incentive for managers and accountants in choosing accounting

methods Furthermore, Healy (1985, p106) discussed bonus schemes create incentives for managers to select accounting method to maximize the value of their bonus If

accounting earnings rather than other measures (stock prices, case flow operation) are used to calculate the managers’ payoff (Smith & Watts 1982), the more they are

motivated to choose accounting methods to increase their bonuses Under the

opportunistic perspective, the managers only act in the manner that maximizes their wealth It helps to clarify that money is one of the major motivation that causes

managers to act opportunism

3 RESEARCH METHODOLOGY

3.1 Research objectives

The study is designed to indicate the effects of monetary incentives on effort and task performance in Vietnamese companies There are three main objectives of this study:

Firstly, this study will provide a theoretical framework on the basic concepts and

theories involved in monetary incentive in task and effort performance of managers and accountants There are not many things as monetary incentive It is used unquestionably and becomes the most powerful motivational technique in many Vietnamese companies Therefore, it is also essential to understand the importance of monetary incentive to maximize the effectiveness and awareness of monetary policies in the workplace

The second objective is obtained from the questionnaire The research will give the common test about the application of monetary incentive in the Vietnamese companies Since then recognizing the actions can occur if the company does not provide

satisfactory monetary incentive policy Although monetary incentive is used popularly in many companies, using money tool is not easy at all If the companies do not use

monetary policies wisely, monetary incentive will bring out disadvantages for

companies in the case of managers and accountants manipulating accounting numbers This may lead to many wrong actions in preparing the financial statements

The third objective is to give conclusions about the use of monetary incentive in

encouraging performance in Vietnamese companies Because of the difference in the

nature of human being, the ways to utilize monetary incentive in each company are also different The companies usually take many different ways to ensure high effort and task performance of managers and accountants and then evaluate the way companies use monetary incentive to reconcile the complex relationship among owners and managers

information and unknown the accuracy Much information only can be used as the