An overview of management compensation

Abstract Accounting curricula should change to meet the evolving needs of business, including needs of the accounting profession. One increasingly complex element of the business environment is the appropriate design of management compensation systems. Concerns regarding the level of executive pay, the debate over stock options, the emphasis by the International Accounting Standards Board on determining appropriate accounting for share-based compensation, and the lack of current accounting standards regarding share-based compensation in most countries challenge our thinking regarding the accounting for and the design and evaluation of compensation alternatives. As future accountants, consultants, and financial managers designing and accounting for compensation plans, students must understand both the broader business issues surrounding the use of these contracts and the accounting, tax, and managerial issues associated with compensation alternatives. We provide a general discussion of different compensation mechanisms, their benefits and limitations, and their related financial, tax, and managerial accounting implications. In addition, we provide technical references to enable students to conduct a detailed investigation of each type of compensation to facilitate a rich, rigorous discussion in the classroom. We recommend using this paper in financial, tax, and managerial accounting courses to broaden students' understanding of all these issues beyond the more focused discussions typical in these courses.