Studying the relationship between the behavior of expenses and the remuneration of the board of directors in the pharmaceutical, chemical, food, automobile and basic metal industries of companies admitted to the Tehran Stock Exchange.

Master's Thesis in Accounting

Abstract

The creation of joint-stock companies and the emergence of conflicts of interest between owners and managers necessitated the formulation of practical solutions to eliminate this conflict, which is known as agency problems in the literature of finance and accounting. This issue caused a lot of research to be done in the field of accounting and financial knowledge. Using rewards as one of the motivating factors in managers can reduce the conflict of representation. How is performance related to managers' compensation and is there an asymmetry between performance and managers' compensation? And can the cost behavior justify the asymmetry of the relationship between performance and reward? And whether there are factors to moderate these relationships? These are the questions that this research tries to answer.

Based on this, 58 companies have been analyzed during the period of 1387 to 1391 through combined data using the panel method (Panel-Data). The results indicate that the changes in asset returns (performance) caused by the behavior of expenses (normal and abnormal behavior of expenses) have a positive and significant relationship with the changes in rewards. Also, the effect of two moderating factors not related to current profit, i.e. expected future sales and capacity utilization, was considered on the relationship between cost behavior and reward changes. that only capacity utilization has affected this relationship, but this effect has not been in the direction of resolving the asymmetric relationship between changes in remuneration and changes in return on assets resulting from the behavior of costs in Iranian companies. These findings show that in the absence of specialized committees such as remuneration as one of the pillars of corporate governance, companies do not correctly interpret and analyze the relationship between income and expenses and the impact of some factors that moderate them when paying managers' remuneration, thus the basis of remuneration is not efficient and companies blindly support their managers. These findings can, in addition to enriching the theoretical foundations of the relationship between performance and reward, show the necessity of creating a reward committee in Iranian companies. Also, policy makers and professional unions can make the use of the country's limited resources more efficient by formulating appropriate reward strategies and reduce the potential representation conflict in companies, which was the main purpose of establishing rewards based on it.

Key words: cost behavior, board of directors' reward, expected future sales, capacity utilization

Introduction

Until the 17th century, companies or to They were founded and managed individually or as non-stock companies owned by two or more partners. The progress of science and the emergence of the industrial revolution caused the emergence of a new form of companies called joint stock companies in the world. The administration of these companies, which were established with the capital of a large number of people, was entrusted to professional managers. In this way, the management of the institutions was separated and differentiated from the ownership of their capital. The formation of joint-stock companies and the participation of a relatively large number of investors in the capital market have created changes in the relations between shareholders and professional managers of such companies and have practically separated ownership from management. Today's joint stock companies are formed by the collective efforts of groups such as managers, employees, shareholders and creditors. These groups come together in a joint stock company through the conclusion of various formal and informal contracts. For many years, economists assumed that all groups related to a joint-stock company work for a common goal, but many cases of conflicts of interest between groups and how companies face such conflicts have been raised by economists. These cases are generally discussed and analyzed in the form of agency theory (Moradi, 2018).

As stated, joint-stock companies are formed by concluding contracts between different groups, the first of which is the company's contract with the manager, which is one of the most important contracts because it leads to the conclusion of other contracts with interested groups and can affect the conditions of other contracts. To reduce the conflict of representation of this important contract "Owners - Managers" reward is the main solution. Based on this belief, in the case of establishing a suitable model for paying bonuses, managers will act in the interests of shareholders and lenders.The main reason for the reward plan is that managers should be rewarded for their organizational responsibilities and create the necessary motivation for better performance in them (Mohammadian, 1392, quoted by Modares Sabzevari, 1374).

Despite stating the direct relationship between performance and reward according to the results of past research, this relationship is seriously doubted. A group of researchers believe that this relationship does not have symmetry when the performance is positive or negative, and they consider the reason for this to be related to the behavior of expenses to the manager's performance (Keylor and Lopez, 2013). According to this basic question and doubt, how is this relationship in Iranian companies and is there an asymmetry between performance changes and reward changes? It was a topic that we are trying to investigate in this research. Therefore, in the following, after stating the problem, the importance, territory, goals, hypothesis and research method will be presented, and finally the words and framework of the next chapters will be presented. Generally, due to agency theory, there is expected to be a direct relationship between remuneration and manager performance, but recent research has shown that when company performance or profits decrease, the relationship between remuneration and profits decreases (Gover and Gover [1], 1998). It has also been shown in other researches that when the return on assets decreases, the sensitivity between rewards and profits decreases in cases where rewards depend on performance (Matsunaga and Park [2], 2001; Jackson et al. [3], 2008). These findings show that the relationship between profit and reward is not the same when the company's performance is positive and negative (Babchak and Fried[4], 2004; Jensen and Murphy[5], 1990).

Another group of researchers believe that the reason for the difference in the relationship between performance and reward in good and bad companies is related to the behavior of costs rather than the manager's performance. In response to the claim that managers are protected against a decrease in profits, they believe that this is not the case, but the behavior of costs that causes less sensitivity of performance to rewards (Kailor and Lopez [6], 2013). In this framework, Keilor and Lopez 2013 stated the normal and abnormal behavior of costs [7] as follows: Normal behavior of costs means that an increase in sales will lead to an increase in costs, but an increase in costs will increase less than an increase in sales, so that the net effect of an increase in sales will increase the return on assets. Also, the decrease in sales has caused a decrease in costs, but the decrease in costs is less than the decrease in sales, so that the net effect of the decrease in sales causes a decrease in the return on assets. And the abnormal behavior of costs in such a way that the increase in sales is accompanied by a decrease in costs, or a decrease in sales is accompanied by a decrease in costs, but the decrease in costs is more than the decrease in sales, and finally the net effect of these two behaviors is the increase in the return on assets or their abnormal behavior. And if there is a decrease in sales along with an increase in costs, or an increase in sales along with an increase in costs, but the increase in costs is greater than that, the effect of these two behaviors will cause a decrease in the return on assets or their abnormal behavior (p. 234).

Previous researches showed that examining the relationship between income and costs can have more information content. In this context, a group of researchers obtained evidence that the study of the relationship between income and expenses (R2) can have more information content about the sustainability of profits. Their findings showed that the relationship between sales and costs provides more information about the sustainability of profits than the separate examination of sales and costs. They found that analysts and the market do not consider the combined information obtained in relation to sales and costs (Gu et al. [8], 2006). Despite the above, Keylor and Lopez believe that two factors unrelated to current profits, i.e. expected future sales and capacity utilization rate, affect the relationship between cost behavior and board remuneration. It has also been shown in research that cost behavior is associated with the interaction between changes in sales and the level of capacity utilization (Balakrishnan et al.[9], 2004). When sales decline, excess capacity occurs because a portion of capacity is fixed for a range of sales activity.