CHAPTER-II

REVIEW OF LITERATURE

2.1. Introduction:
Review of literature is a key step in research process. Review of
literature refers to an exhaustive and systematic examination of
publications relevant to the research. The significance of the review
of literature shows that it provides a basis for future investigations,
justifies the need for replication, throws light on the feasibility of the
study, indicates constraints of data collection and helps to relate the
findings of one study to another.
It has been emphasized by many researchers and scientists
that review of literature can play a vital role in a research project and
it is a critical summary of research on a topic of interest. It is
generally prepared to put a research problem in context or to identify
gaps and weakness in prior studies so as to justify a new
investigation.
One of the simplest ways of economizing a research is to review
and build upon the work already done by other research scholars.
There are number of studies related to Human Resource
Development, Personnel Management, Reward Management,
Compensation Management, etc, but most of them have
concentrated on broader areas of interest and as such, to narrow the
study, compensation management practices in public sector,
especially in energy sector is essentially needed to be studied. As
such, the researcher was searched Management Reviews,
Management Abstracts, research journals, conference proceedings,
books, etc., and collected the relevant literature for the present
study. All the studies are not significant enough to be enumerate,
however, an effort has been made to review and highlight briefly the
objectives and findings of the important studies relevant to the
present work in the following paragraphs.

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2.2. Review of Articles:
The collected research articles relating to compensation
management is reviewed as under:
Matthew Freedman and Renata Kosova1 (2012) writes a
paper entitled “Agency and Compensation: Evidence from the Hotel
Industry” in ‘The Journal of Law, Economics, and Organization’ and
examined how agency problems in the workplace interact with
compensation policies by taking advantage of the structure of the
hotel industry, in which many chains have both company-managed
and franchised properties. As residual claimants on their properties’
profits, franchisees have stronger incentives to monitor employees
than managers in company-managed hotels. Exploiting this variation
and using rich, longitudinal data on the hotel industry, the effort has
been made to estimate differences in wages and human resource
practices across company-managed and franchised hotels within
chains as well as within individual hotels as they change
organizational form. The results suggest that the timing of pay and
the propensity to use performance-based incentives relate to the
extent of agency problems within establishments.
Yao-Hung Yang2 (2013) conducted a study and published a
research paper entitled “An Investigation of the Business
Performance and Manager Compensation of Taiwanese Non-Family-
Controlled and Family-Controlled International Businesses” in
‘International Journal of Economics and Finance’. This study
explores the problem of the communities of interest that form when
management and ownership overlap. Samples were obtained from
the Taiwan Economic Journal (TEJ) data bank from 2005 to 2011.
The result of non-family-controlled international businesses shows
that business accounting performance is improved when directors
serve as managers; however, if control rights exceed ownership rights
to a great extent, business accounting performance declines. The
results of family-controlled international businesses shows that
directors who serve as managers can monitor compensation

14
effectively; however, if control rights exceeds the ownership rights to
a great extent, communities of interest can pursue selfish interests.
In this study, suggested that directors serve as managers to improve
business performance and supervise managers’ compensation.
Moreover, controlling shareholders should serve as board members
with a certain proportion to prevent excessive interest assimilation.
Afroja Rehan Rima and Md. Rifayat Islam3 (2013) have
written a paper “A Case Study on Compensation System Practices in
the Perspective of Telecom Industries of Bangladesh” in ‘American
International Journal of Research in Humanities, Arts and Social
Sciences’. Telecommunication sector in Bangladesh has always been
leading the way to initiate new products and services in the local
marketplace. The total strength of this sector depends on their
employees stood at approximately 20,000 at the end of the year.
The telecom industry considers that a hefty, skillful and enthusiastic
employee is the key factor to success. The continual expansion of
their people is an essential factor in driving their growth ambitions.
They place a strong importance on how they are investing on their
people and in people development, building a strong performance
culture and driving the right levels of motivation across the
organization. “People” are the central focus, which is why they
maintain a very strong Human Resource Managing Culture
throughout their organizations. As they give more focus on their
employees and for that they want to do best for them through
motivation so that they will be able to perform in an efficient and
effective way. Though there were some dark sided regarding the full
utilization of the process in the perspective of Bangladesh; still the
telecom industry in Bangladesh getting benefitted from it. A good
compensation system is very much effective for an organization;
whatever the industry. It creates an opportunity for the telecom
industry in Bangladesh’s employees as well for high involvement with
the organization. Through a strong and standardized compensation
system, employee can compare themselves with others. No

15
compensation system can succeed without a clear, concise, and
comprehensive communication plan. Every employee should make
clear themselves about the whole process to proceed for further and
make them competent in such a competitive market place. In this
case study, a brief description of compensate issues has been
highlighted and finally build up a comparison between two leading
telecom companies in Bangladesh and make some effective
recommendations.
Maria Joutsenvirta4 (2013) published a paper “Executive Pay
and Legitimacy: Changing Discursive Battles over the Morality of
Excessive Manager Compensation” in ‘Journal of Business Ethics’.
This study investigated discursive processes through which heavily
contested executive pay schemes of the Finnish Energy Giant Forum
were constructed as (i) legitimate in public during 2005–2009.
The critical discursive analysis of media texts identified five
legitimation strategies through which politicians, journalists, and
other social actors contested these schemes and, at the same time,
constructed subject positions for managers, politicians, and citizens.
The comparison of two debate periods surrounding the 2007–2008
financial crisis revealed significant differences in the discursive
strategies and the corresponding moral struggles linked to
legitimation of executive compensation. The analysis highlights a
change in moral reasoning by social actors as they adapt their
justifications to a changing social context. This study has important
implications for our understanding of the ethical aspects and socio-
political embeddedness of manager compensation. In particular, it
adds to the knowledge of organizational legitimacy by showing how
discursive strategies and the corresponding morality constructions
used to (de)legitimate business activities can shift quickly as a result
of a change in the social and political climate surrounding the
legitimating struggle.
Hang Le et al.5 (2013) conducted a study and published an
article entitled “Management Compensation Systems in MNCs and

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Domestic Firms: Cross-National Empirical Evidence” in ‘Management
International Review’ and it is a study of the relationship between
institutional settings and managerial compensation systems, based
on extensive cross-national survey evidence. The authors compared
the differences in practices between Multinational Corporations
(MNCs) and domestic firms across a range of capitalist archetypes. It
was found that MNCs are more likely to promote compensation
systems that incentivize managers in line with organizational
performance compared to domestic firms. The findings also reveal
persistent diversity reflecting firm type and institutional setting. The
authors find that the gap between MNCs and domestic firms in terms
of the usage of incentive-related compensation is less pronounced in
Liberal Market Economies than in other settings. This suggests that
it is a combination of being an MNC and the specific home locale that
moulds approaches to managerial compensation. This reflects
considerable hybridization of practices within and between settings.
Bijan Abedini et al.6 (2013) published a paper entitled
“Analysis of the Relationship between Managers’ Compensation and
Earnings in Companies Listed in the Tehran Stock Exchange” in
“Journal of Educational and Management Studies”. The objective of
the paper is to study the relationship between managers’
compensation and earnings in companies. It is a causal-analytic
survey which is based on analysis of panel data. In this study, the
financial information on 112 companies listed in the Tehran Stock
Exchange from 2006 to 2010 is analyzed. It shall be mentioned that
560 companies were listed in the Tehran Stock Exchange each year.
The SPSS 20, EVIEWS 7 and MINITAB 16 software were used for
analysis of the research results. The results of the study shows that
there is a significant direct relationship between managers’
compensation and earning.
Yusuf Mohammed Nulla7 (2013) published “The Examination
of Top Manager Compensation System of NYSE Energy Companies”
in ‘Strategic Management Quarterly’. This study investigated CEO

17
compensation system of NYSE energy companies. It tested the
relationship between CEO compensation, firm size, accounting firm
performance, and corporate governance, from 2005 to 2010. The
totaled twenty five companies were selected through random
sampling method from NYSE index companies. The research
question for this study was: is there a relationship between CEO
cash compensation, firm size, accounting performance, and
corporate governance? To answer this question, nine statistical
models were created. It was found that, there was a relationship
between CEO salary, CEO bonus, total compensation, firm size,
accounting performance, and corporate governance. The correlations
between CEO salary, CEO bonus, CEO total compensation and firm
size were ranged from moderate to strong positive ratios. The
correlations between CEO compensation and firm performance were
ranged from low negative to strong positive ratios. The correlations
between CEO compensation and corporate governance were ranged
from low negative to moderate positive ratios.
Abbdul-Jaleel Saani8 (2013) writes on “Influence of
Compensation and Supervision on Private Basic School Teachers
Work Performance in Ashaiman Municipality” in ‘International
Journal of Business and Social Sciences’. This study investigated the
influence of compensation and teacher supervision on teacher work
performance. A total of 103 randomly selected private basic school
heads and teachers in the Ashaiman community of Tema, Ghana
completed the questionnaire. Data for the study were analyzed using
multiple regression analysis. It was found out that compensation and
teacher supervision relate positively to teacher work performance;
however, the two variables do not directly predict work performance.
They do so only if teachers are satisfied with the forms of
compensation available to them. It is therefore recommended that
management of private basic schools should design attractive
compensation packages for their teachers. They should also use

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appropriate supervision strategies in their schools, as this increases
teacher work performance.
Amit Hole and Ashutosh Misal9 (2013) published a paper
entitled “Impact of Compensation Strategies on Performance of
Insurance Agents in General Insurance Companies” in ‘Tactful
Management Research Journal’. Since 1956, with the nationalization
of insurance industry, the LIC held the monopoly in India’s life
insurance sector, GIC, with its four subsidiaries, enjoyed the
monopoly for general insurance business. From 1991 onwards, the
Indian Government introduced various reforms in the financial
sector paving the way for the liberalization of the Indian economy. It
was a matter of time before this liberalization affected the insurance
sector. Insurance being one of the segments of financial sector, it has
in the recent past gone through a transformation and change
including the passing of IRDA (Insurance Regulatory and
Development Authority) Act 1999. Due to the IRDA Act 1999 the
insurance sector has been opened up, the monopoly of government
companies has broken and many new private players have entered
into the insurance sector and thus the sector has become highly
competitive with full of challenges. Several factors account for new
private general insurance companies speedily penetrated in the
market. Private companies develop new distribution channels. They
were having particular success in forging bank assurance alliances,
through direct marketing. This research paper analyzes impact of
compensation policies on performance of insurance agents for
general insurance sector. It helps to improve the market share of
public sector general insurance company by improving performance
of insurance agents by motivating them by technique of
compensation management. It provides a toolset for strategic
remuneration planning that reflects organization culture and pay
strategies.
Rim Ben Hassen10 (2014) writes on “Executive Compensation
and Earning Management” in ‘International Journal of Accounting

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and Financial Reporting’. Given the growing complexity of business,
the need for financial reporting to include more reliable information
is increased. For this information to be relevant, they must be
conducted in an implementation of an efficient system of control to
ensure a high quality result. The directors of listed companies may
be required to affect the quality of accounting earnings as their
compensation depends. Therefore, it would be wise to examine the
relationship between the elements of executive compensation and
earning management. The objective of this paper is to examine one of
the motivations that could encourage managers to manage the
accounting results, namely the managerial remuneration. The result
of this study shows that executive compensation is determined by
the requirements of earning management. Specifically, our litters
indicate that total compensation is negatively related to the absolute
value of accruals. This result confirms the theoretical hypothesis
alignment of interests of executives with those of shareholders.
Roya Anvari et al.11 (2014) conducted a study and presented
a paper entitled “Mediating Effects of Affective Organizational
Commitment and Psychological Contract in the Relationship Between
Strategic Compensation Practices and Knowledge Sharing” in
‘International Conference on Innovation, Management and
Technology Research’. This study contributes to the development of
the knowledge management and strategic compensation literatures
through developing the linkages between them. The study sample
comprised of 301 employees from universities of medical sciences in
Iran. Multiple and simple linear regression and path analysis were
used to test the direct and mediated relationships among the
variables. Results highlighted significant relationships between (a)
strategic compensation practices and affective organizational
commitment (b) affective organizational commitment and knowledge
sharing (c) strategic compensation practices and psychological
contract and (d) psychological contract and knowledge sharing. The
study revealed that strategic compensation practices are positively

20
related to affective organizational commitment and psychological
contract. In addition, the results provided evidence that affective
organizational commitment and psychological contract have a
significant mediating effect on the relationship between strategic
compensation practices and knowledge sharing. Managerial and
practical implications of the findings are highlighted.
Grace Mwamburi Odhiambo and Esther Waiganjo12 (2014)
examines the role of human capital management strategies on the
mobility of employees, specifically, the influence of communication of
corporate strategy, organizational alignment strategy, compensation
strategy and transformational leadership strategy on employee
mobility. It adopted a case study research and used a semi-
structured questionnaire to collect data that was analyzed using
Microsoft Excel and SPSS. The study’s findings revealed that JKUAT
had communicated its corporate strategy well as over 90% of the
respondents were aware of the vision and mission. Presence of
transformational leadership was also established. Organizational
alignment was found to be non-existent while compensation strategy
emerged as the most prominent trigger for employee mobility.
The research recommends that the university considers utilizing its
ICT infrastructure and telephone as channels for disseminating
strategy information; incorporating the HR function in the university
management board and reviewing its compensation system for equity
and alignment with responsibilities and qualifications.
Uthra13 (2014) published an article entitled “A Study on
Compensation Management at Sri Steel Industries Limited,
Coimbatore” in ‘The International Journal of Business and
Management’. In Today’s Dynamic Economy, with increased
corporate competition and the job uncertainty that follows hand in
hand with mergers and acquisitions, it is becoming ever more
important to offer employees a benefits package that they perceive to
be of great value. Not only benefits packages help to retain
employees, they can help to attract qualified candidates to add to the

21
workforce. The sound compensation system is hallmark of
organization’s success and prosperity. The success and stability of
organization is measured with pay-package it provides to its
employees. Compensation dissatisfaction can lead to absenteeism,
turnover, job dissatisfaction, low performance, strikes and
grievances. Majority of labor-management disputes relate to
compensation. The objectives of the study are to study the
compensation management practices in the organization and also to
identify the type of compensation and analyze the satisfaction of
workers with regard to compensation. The study assumes the nature
of descriptive research. The sample size considered for the study is
50. The respondents are the employees of Sri Steel Industries
Limited, Coimbatore. The sampling technique used is Strata
sampling. The data is collected from the sample through
Questionnaire method. The statistical tools used for analysis are chi-
Square and mean score. The mathematical tool used is percentage
analysis. It is found that most of the employees are satisfied with the
compensation policy followed at their organization and they are also
satisfied with the non-monetary benefits provided, basic pay, house
rent allowance, dearness allowance ,conveyance allowance, medical
benefits provided, over time allowance, travelling allowance. The
employees are dissatisfied with the leave rules laid. From the chi-
square analysis it is observed that there is no relationship between
the no. of year’s service and giving equal part in decision making
process and it is also observed that there is a significant relationship
between the work performance of the employee and the kind of
compensation. It is recommended that management can consider the
pay revision at least once in every three years and as respondents
are dissatisfied with the leave rules of the organization management
can laid down the leave rules in consultation with the employees, if
possible.

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 Nate Holdren14 (2014) published on “Incentivizing Safety and
Discrimination: Employment Risks under Workmen’s Compensation
in the Early Twentieth Century United States” in ‘Enterprise and
Society’. This article takes criticisms of employment discrimination in
the aftermath of the creation of workmen’s compensation legislation
as a point of entry for arguing that compensation laws created new
incentives for employment discrimination. Compensation laws
turned the costs of employees’ workplace accidents into a risk that
many employers sought to manage by screening job applicants in a
manner analogous to how insurance companies screened policy
applicants. While numerous critics blamed insurers for
discrimination, the author argue that the problem was lack of
insurance. The less that companies pooled their compensation risks
via insurance, the greater the incentives for employers to stop
employing people they would have previously been willing to hire.
Abdul Hameed et al.15 (2014) published “Impact of
Compensation on Employee Performance (Empirical Evidence from
Banking Sector of Pakistan)” in ‘International Journal of Business
and Social Science’. Compensation is very important for the
performance of the employees. Therefore, they are very important for
the organization too. The purpose of this research is to measure the
impact of compensation on employee performance. A questionnaire
was designed to collect the data on the factors related to
compensation like salary, rewards, Indirect Compensation and
employee performance. The data was collected from different banks
of Pakistan. The data collected were analyzed in SPSS 17.0 Version.
Different analytical and descriptive techniques were used to analyze
the data. It is found from different results that Compensation has
positive impact on employee performance. It is proved from
correlation analysis that all the independent variables have weak or
moderate positive relationship to each other. Regression analysis
shows that all the independent variables have insignificant and
positive impact on employee performance. Descriptive analysis also

23
reveals that all the independent variables have positive impact on
employee performance. ANOVA results reveal that education have
not same impact on employee performance. The major limitation of
this research is that this study only covers the banking sector of
Punjab. Another limitation is that it excludes many variables of
compensation due to shortage of time. Funds were also another
limitation. Apart from these limitations this research may provide
insights to the managers to enhance the employee performance of
their subordinates.
Avinash Pawar and Charak16 (2014) writes and article
entitled “A Study and Review of Employee Value Proposition: A Tool
of Human Resource Management” in ‘Review of Research’. The
Employee Value Proposition (EVP) represents the perceived overall
deal between employer and employee. The employer makes an offer
to the employee (or the give) and expects contributions (or the get)
from the employee in return. The inducements and contributions
consist of mutual obligations and promises. Inducements typically
concern things such as career progression, organizational support,
fair and transparent performance management and more tangible
things such as pay and holiday entitlements. Contributions relate to
things such as working hours, being an advocate of the employer
within and outside the organization, bringing skills, enthusiasm and
entrepreneurship to productive work. Importantly, within the overall
deal there are nested deals operating at different levels of the
organization, such as the tailored, workable arrangements forged
between team leader and team members, these reflect opportunities
available for employees to shape their work experience. Top-
performing companies create a sustainable EVP and total rewards
strategy based on the needs, demographics and preferences of their
workforce. Employee Value Proposition refers to the rewards and
benefits that an employee receives in return of the performance that
he gives at the workplace in the organization. Manpower planning is
putting the right number of people, right kind of people at the right

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place, right time, doing the right things for which they are suited for
the achievement of organizational goals. EVP is at the core of all
other organizational processes. The characteristics of the EVP need
to be reflected in the corporate and employer brands. The EVP, if
maintained well is the driver of engagement, it informs recruitment
messages and communications and it helps to inform strategic HR
priorities. It helps to support and drive business strategy forward.
People are the most important assets. Treat them like they make a
difference and they’ll make a difference. This paper takes the Review
of Concept of Employee Value Proposition and its relationship with
Human Resource Management.
Adisa Delić and Amra Nuhanović17 (2014) published a paper
entitled “Management Compensation and the World Economic Crisis:
Evidence from Bosnia and Herzegovina” in ‘Asian Journal of
Business Management’. In the published scientific discussions the
main factors – causes of crisis have been often analyzed. All those
(up to now) analyzed factors make the crisis long-lasting, harder,
uncertain with hardly predictable implications. On the other hand,
understanding the cause and preventing the consequences of crises
are an important precondition of economic and social development of
any country. With regard to this, the main aim of research by the
authors is to explain the view according to which, the greed of Wall
Street bankers caused by excessive management compensation has
also been, inter alia, one of the relevant factors causing and
deepening the 21st century world economic crisis. Furthermore, the
paperwork provides an overview of possible directions of regulation in
the field of management compensation, all with the aim to prevent
large scale crises in the future. Finally, to complete the research, the
authors have analyzed the state in the field of management
compensation in Bosnia and Herzegovina.
Ofoegbu Onyema18 (2014) writes an article entitled “Assessing
the Relationship between Human Resource Management and
Employee Job Satisfaction: A Case Study of a Food and Beverage

25
Company” in ‘Journal of Business Administration Research’.
The relationship between human resources management practice
and Employee job satisfaction has always been contentious. The
study therefore, set out to examine and indeed ascertain the true
state of such relationship using the Nigerian Breweries as a case
study. Survey design was adopted in the gathering of the primary
data. Questionnaire was designed and administered on some staff of
the organization. The data gathered was analyzed using regression
method and Pearson's correlation. The result of the study indicates
that recruitment and selection, training and development,
performance appraisal and compensation (human resources
management practice variables) jointly and independently predict job
satisfaction. It is recommended that to improve competitive ability
organizations need to recruit and retain competent staff. This can
only be done through good human resource management practices.
Tarus Kipkorir Erick et al.19 (2014) published a paper
entitled “The Relationship between Executive Compensation and
Financial Performance of Insurance Companies in Kenya” in
‘Research Journal of Finance and Accounting’. This paper sought to
assess the effect of executive compensation on the financial
performance of insurance companies in Kenya. The study considered
functional form relationship between the level of executive
remuneration and key performance ratios by using a regression
model that establishes the relationship between pay and financial
performance. The results show that there is a non-significant
relationship between executive compensation and financial
performance, P-Value>0.05. The negative correlation suggests the
capping of executive compensation to maximize shareholders
returns. This advocates that key performance ratios are not key
considerations in determining executive compensation among the
insurance companies in Kenya. Hence, there is need to sensitize
executives to align their payment to accounting performance
measures because they are directly linked to shareholder’s wealth

26
maximization. The study’s findings are useful to managers in
insurance companies for strategic planning. The arguments of this
study are based on the agency theory and review of relevant
literature.
Alice Chepkorir Milgo et al.20 (2014) conducted a study and
published a paper entitled “Reward and Compensation as a
Determinant of Employee Commitment: A Survey of KTDA Tea
Factories in Kenya” in ‘European Journal of Business and
Management’. The purpose of this study was to investigate the
determinants of employee commitment in tea organizations in Kenya.
Strong commitment is correlated with high productivity, while low
commitment lowers productivity. The primary objective of this
research was to determine the influence of reward and compensation
on employee commitment in tea factories in Kenya. To achieve this
objective a survey was conducted to canvas the opinions of
respondents in public KTDA tea factories in Kenya. Purposive
sampling was employed to select six (6) factories based on second
payment known as bonus; with three (3) high paying and three (3)
low paying. Stratified sampling technique was used to categorize
population into managers and employees. Random sampling was
used to give the sample size of employees. A total of 273 respondents
were randomly selected from a population frame of 861 employees.
Qualitative and quantitative data was collected by use of self-
administered structured questionnaires and interview schedule.
Analysis of data showed low paying factories had a lower average
mean in all aspects of reward and compensation 54.93 percent
compared to high paying at average mean 71.60 percent. Further
analysis using Spearman’s rank correlation test revealed significant
relationship (P=0.00<0.01) between reward and compensation and
commitment. The study confirmed the significance of reward and
compensation as a determinant of employee commitment. This study
has implications for management of KTDA tea factories in Kenya
since they can influence employees to achieve optimized motivation

27
and commitment, by designing a good reward and compensation that
is perceived as fair, equitable and consistent.
As stated by Emmanuel Erastus Yamoah21 (2014) in his
paper entitled “Exploratory Analysis of Compensation and Employee
Job Satisfaction” published in ‘Developing Country Studies’,
organizations are made up of people and the success or failure of
these organizations are dependent on the people in the organization.
It has been proven time and again that one of the ways to get the
best performance out of employees is to make them comfortable and
happy. Workers of all ages and income brackets continue to grow
increasingly unhappy at work a long-term trend that should
seriously concern employers. How then do managers create satisfied
employees? Since compensation has been a major factor of
motivating employees in an organization. This study examined the
issue compensation and employee job satisfaction. Data was
collected and analyzed in terms of descriptive statistics and Pearson
chi square was used to test the significance of relationship between
compensation and employee job satisfaction. The result indicated
that there is no significant relationship between compensation and
employee job satisfaction among the respondents. However,
components of compensation such as career development and job
security were major contributing factors to employee job satisfaction.
The study recommended that better career development
opportunities should be given to the employees to increase job
satisfaction.
Mohammad Rahim Uddin et al.22 (2014) published an article
entitled “Compensation Management from Islamic Perspective” in
‘European Journal of Business and Management’. Around the world
Muslims are rediscovering Islam; consequently there is a growing
demand of practicing Muslims for compensation from Islamic
perspective. But lack of adequate Islamic guidelines regarding
compensation system is one of the key constraints to the way of
ensuring employee compensation from Islamic point of view. So this

28
study is an attempt to minimize the gap found therein. In this study
a framework for determining and ensuring employee wages and
compensation system has been developed in the light of Islamic
principles. If the compensation system is managed from Islamic
perspective both employees and employers will not only gain
conducive, congenial and productive working environment in this
world but also can expect for getting salvation in the hereafter.
Yinghong Zhang23 (2014), In his paper entitled “The Impact of
Auditor Changes on CEO Compensation” written in ‘International
Journal of Economics and Finance’, investigated that whether
auditors are a good external control mechanism to restrain
management from intentionally increasing CEO compensation
through earnings management. To examine this, the author regress
variations of CEO cash and total compensation on changes in
auditors after controlling financial, stock market, industry and year
variables. There are two sample periods. In the period 1993–2004,
the paper examined the impacts of overall auditor changes and
auditor changes that are classified by the audit failure or auditor
brand names. In the period 2000–2004, the author checks the
influences of auditor resignations and of auditor dismissals due to
accounting disagreements. The empirical results shows that changes
in cash compensation is positively related to the existence of auditor
changes and this relationship actually comes from auditor changes
from big 5 auditors to non-big 5 auditors. Meanwhile, changes in
total compensation is negatively associated with the appearance of
auditor switches from non-big 5 auditors to big 5 auditors. These
findings are consistent with the notion that big 5 auditors are more
active at discouraging earnings management. Overall speaking, the
empirical evidences support the belief that auditors do not function
very well to monitor managers’ opportunistic behaviors.
An Chen24 (2014) published an article entitled “Incentive-
Compatible Compensation and Regulation” in ‘Applied Economics’.
This article uses contingent claims analysis and regulatory

29
constraints to show how a bank can create incentive-compatible
compensation for the senior management aligned with the interests
of the other stakeholders. For this purpose, the remuneration
package takes the form of ‘call spread’ on the bank’s equity. Unlike
regular stock option programmes, a call spread limits the upside
potential for the senior management. This prevents unlimited risk
taking. Additionally, a maximum regulatory default probability also
constrains risk-taking behaviour. The author shows under which
parameterizations the remuneration package and the regulatory
constraint offer equal incentives for the senior management.
Knut J. Ims et al.25 (2014) published on “How Economic
Incentives May Destroy Social, Ecological and Existential Values: The
Case of Executive Compensation” in ‘Journal of Business Ethics’.
Executive compensation has long been a prominent topic in the
management literature. A main question that is also given
substantial attention in the business ethics literature—even more so
in the wake of the recent financial crisis—is whether increasing levels
of executive compensation can be justified from an ethical point of
view. Also, the relationship of executive compensation to instances of
unethical behavior or outcomes has received considerable attention.
The purpose of this paper is to explore the social, ecological, and
existential costs of economic incentives, by discussing how relying on
increasing levels of executive compensation may have an adverse
effect on managerial performance in a broad sense. Specifically, the
authors argue that one-dimensional economic incentives may
destroy existential, social, and systemic values that influence the
manager’s commitment to ensure responsible business conduct and
have negative spillover effects that may reduce the manager’s
performance. There are well-documented findings that demonstrate
that reliance on sources of extrinsic motivation (such as economic
incentives) may displace intrinsic motivation. The perspective of the
study is a holistic one, in the sense that the authors explored the
influence of sources of extrinsic motivation on the manager’s

30
intrinsic commitment to different types of values. The authors, in
particular investigated how it may influence the manager’s ethical
reflection and behavior or lack thereof.
Sunil Dutta and Qintao Fan26 (2014) writes on “Equilibrium
Earnings Management and Managerial Compensation in a Multi-
period Agency Setting” in ‘Review of Accounting Studies’. To
investigate how the possibility of earnings manipulation affects
managerial compensation contracts, the authors studied a two-
period agency setting in which a firm’s manager can engage in
window-dressing activities to manipulate reported accounting
earnings. Earnings manipulation boosts the reported earnings in one
period at the expense of the reported earnings in the other period.
The authors found that the optimal pay-performance sensitivity may
increase and expected managerial compensation may decrease as the
manager’s cost of earnings management decreases. When the
manager is privately informed about the payoff of an investment
project to the firm, the authors identify plausible conditions under
which prohibiting earnings management can result in a less efficient
investment decision for the firm and more rents for the manager.
Jaideep Chowdhary27 (2014) writes on “Impact of Financial
Constraint on Incentive Compensation and Product Market Behavior”
in ‘Economics Bulletin’. The paper introduces financing constraing in
a model of incentive compensation and product market and develops
key insights about the interactions of product market behavior,
financial constraint and incentive compensation. A financially
constrained firm faces higher cost of capital which results in lower
output. The model suggests that a financially constrained firm offers
higher incentive compensation to its manager if the degree of product
differentiation is sufficiently low. This higher incentive encourages
the manager to put more effort and produce more output in order to
compensate for the loss in output due to financial constraint.
The paper generates the testable hypotheses that a financially

31
constrained firm will offer higher incentive compensation to its
manager which has not yet been tested empirically.
Sorasak Tangthong28 (2014) published an article entitled
“A Causal Model of Compensation and Benefits and Reward
Management on Organizational Effectiveness of MNCs” in ‘Asian
Journal of Management Research’. The study is conducted to
investigate the influence of compensation and benefits and rewards
management on Organizational Effectiveness of MNC in Thailand.
The conceptual model created for this study will comprise of
compensation and benefits and reward management as the
independent observed variable, three HR mediating variables, and
Organizational Effectiveness as the dependent variable. A total of
7 theoretically-based hypotheses are developed, indicating possible
positive and negative relationships among the variables in the model.
Input consists of 224 top management, human resources managers/
leaders and line managers. The proposed model is empirically tested
by using AMOS of Path Analysis modeling. The test results found
compensation and benefits and rewards management and the three
HR mediating variables have an influence on Organizational
Effectiveness, thereby better establishing compensation and benefits
and rewards management and Organizational Effectiveness, and
confirming most of the findings of previous research on the subject,
while providing some fresh insights into the interrelationships
between the variables.
Wikil Kwak et al.29 (2014) published a paper entitled “Outside
Director Compensation in the Electric Industry” in ‘International
Journal of Research in Commerce and Management’. Boards of
Directors are supposed to monitor managers’ activities for firm
stockholders based on the agency theory proposition. However,
numerous real world examples shows that boards of directors are not
independent. Firm failures at the turn of century and the market
crash in 2008 have led to increased stockholder activism and the
passage of Sarbanes–Oxley in 2002 and Dodd-Frank Act in 2010.

32
These factors have increased the pressure on boards to be more
effective agents of the stockholders. Therefore, director compensation
as an agent interest alignment tool is an important issue and the
paper investigated this issue in the electric industry around 2008.
Lucy Njogu et al.30 (2014) published an article entitled
“Executive Compensation Consequence on Dividend Payout Among
Listed Manufacturing Companies in Kenya” in ‘Prime Journal of
Business Administration and Management’. The study sought to
establish the effect of executive compensation on dividend payout
among listed manufacturing companies in Kenya. The study used
descriptive survey design. The study population was 104 senior
managers and board of directors in the nine listed manufacturing
companies in Kenya. Stratified random sampling was used in the
study. The study used the questionnaire for data collection.
Regression analysis techniques were used to analyze the data.
Results showed that executive compensation influenced dividend
payout among listed manufacturing companies in Kenya. This was
supported by the responses from respondents that the company CEO
and top management considered the shareholder opinion when
proposing dividend payout, CEO and top management proposed
dividend payout after considering the expectations of shareholders
and dividend payouts are linked to company profitability and are
only paid when there are cash-flows to support them. The study
concludes that executive compensation is very important because it
influences dividend payout. Further, the study concluded that the
management of manufacturing firms mainly used interim dividends
to signal the market of management intentions and the market share
prices of the companies follow the nature and magnitude of dividend
payout. It was also possible to conclude that there was a positive and
significant relationship between executive compensation and
dividend payout. The study further concluded that executive
compensation was statistically significant in explaining dividend
payout. Further the study recommends that the company’s board of

33
directors and management should put in place systems that ensure
that dividends are released on time to ensure that the company
earns trust from the shareholders. It is also possible to conclude that
the companies are required to disclose information regarding
executive compensation in their financial reports to ensure that there
is transparency in issuance of dividends.
Marina Riga et al.31 (2014) writes on “Medical Errors in
Greece: An Economic Analysis of Compensations Awarded by Civil
Courts (2000-2009)” in ‘Open Journal of Applied Sciences’. Medical
errors are reported with increased frequency both in Europe and in
the United States of America and measures are put in place to deal
with the problem. In Greece, more and more patients think that it is
likely to experience a medical error during health care delivery and
the organizations they can turn to if this happens are hardly enough
and with meager response. The consequences of medical errors are
multiple and complex with significant financial implications. Now-a-
days there is an urgent need to resolve problems that refer to cost
containment in the Greek Health System. Some research findings
from the review of 128 compensations awarded by civil courts for the
years 2000 to 2009 for medical errors in Greece are quite interesting.
The mean compensation amounted to €292,613 representing 35.41%
of claimed compensation. Only a small proportion of medical errors
gain publicity as the majority of claims get settled out of court,
covered by the insurance policy or the hospitals. The burden of the
obvious and hidden cost affects not only the patient, his family and
the hospital but also the whole of the society. This comes from the
estimation that the level of compensation awarded by the civil courts
for medical errors is remarkable high. Unfortunately only some
estimates of the cost are possible due to the lack of statistical data.
The creation of an independent oversight body for the review of
medical errors and complaints nationwide as well as the
modernization of the hospitals’ monitoring systems is necessary
in order to handle the medical error phenomenon. Above all,

34
co-operation and trust between patients, health care professionals,
hospital managers, medical boards and the government are essential
to get to the root of the problem.
Tzu-Ching Weng et al.32 (2014) published a paper entitled
“Equity-based Executive Compensation, Managerial Legal Liability
Coverage and Earnings Management” in ‘Journal of Applied Finance
& Banking’. This study investigates how managers’ compensation
incentives, as measured by equity-based executive compensation and
managerial legal liability coverage affect earnings management.
The availability of compensation may encourage managers to adopt
more aggressive accounting practices; however, the higher the legal
liability managers face, the more it will reduce their willingness to
engage in such risk-taking behavior. Once managers mitigate their
personal legal liability through Directors’ and Officers’ (D&O) liability
insurance, they may be more inclined to manipulate reported
earnings. We use excess D&O liability insurance coverage as a proxy
for managerial liability coverage and test a sample of listed firms in
Taiwan where D&O liability insurance purchases are publicly
disclosed. It is found that managers whose compensation is equity-
based are more likely to adopt an opportunistic accounting strategy
when they are covered by relatively high levels of D&O liability
insurance. This suggests that the primary determination of earnings
management is the joint effect of an increase in managers’
compensation incentives and a decrease in their legal liability.
Zhou Jie and Zuo Ling Yan33 (2014) published a paper
entitled “Executive Compensation and Earnings Management:
Empirical Study in China’s Listed Companies” in ‘Advances in
Management’. This paper investigates the relevance between
executive compensation and earnings management of listed
companies in China using discretionary accruals and based on the
assumption that executive compensation contract could react
significantly differently to extraordinary items and ordinary items.
The sample is composed of 5806 firms observations from year 2006

35
to 2010. The findings support the prior empirical research that
executive compensation and discretionary accruals have positive
significance correlation which indicates that managers prefer to use
discretionary accounting choices especially for extraordinary items to
increase their compensation, so as to achieve the goal of earnings
management. Additionally, the results also demonstrate the
correlation between earnings quality and the contract of executive
compensation. Therefore, after the analysis of the whole sample, the
authors think that to standardize earnings management and to
improve the contract of executive compensation are two important
tasks for the listed companies in China.
2.3 Review of Books:
The researcher has collected number of books relating to
compensation management and they are reviewed as follows:
Er Soni Shyam Singh (2008), 34 this book is designed based
on the course design of UGC but is unlike voluminous textbooks. It
tries to clear the concepts to management students and practicing
HR managers to enable them to understand relevant terminologies
and their co-relevance to design and structure a sound
compensation structure, evaluate and benchmark the jobs and tools
of compensation management. It provides comprehensive yet to the
point approaches to learn differentiations and tips to design the
compensation for employees at various levels of the organization.
Tapomoy Deb (2009),35 Compensation Management, the
entire text book has been divided into five theme – based parts which
have been further divided into ten logical, enriching and descriptive
chapters. Each part addresses one broad theme and highlights a
particular aspect of compensation management.
Jerry M. Newman et al. (2009)36, ‘Compensation’ through
the course of this book, the authors are given relevant information
on compensation management, along with strategic decisions to
manage total compensation. Additionally, this book also throws light
on the compensation practices of many leading companies. This book

36
is divided into six parts, each covering different aspects of this
subject. In total, there are 18 chapters, and some of them include
The Benefits Determination Process, Union Role in Wage and Salary
Administration, Government and Legal Issues in Compensation, Pay
For Performance: The Evidence, Defining Competitiveness, Defining
Internal Alignment, and Compensation of Special Groups.
Mousumi S. Bhattacharya & Nilanjan Sengupta (2009)37,
The book has been divided into thirteen chapters, Chapter one
introduces the concept of compensation management. Chapter two
deals with a wide range of economic theories, namely micro-macro
theories, chapter three reveals that the job analyses, which is a
process of identification and determination of the particular job
duties, requirements and responsibilities, Chapter four explains the
concept of performance management and chapter six elaborates the
concept of Performance – Related Pay (PRP). Person-Based pay
rewards and its related issues have been discussed in chapter seven.
In chapter eight the concept of wage differentials has been discussed.
Chapter nine discusses the wage fixation and the concept of ‘Pay
Structure’ is discussed in Chapter ten. Executive compensation and
international compensation have been discussed in chapter eleven
and twelve, respectively. The last chapter of the book discussed
about the strategic prospective of compensation management.
S.K. Bhatia (2009),38 New Compensation Management in
Changing Environment, this book provides easy to read and compact
volume is meant to improve knowledge and in-depth understanding
of various aspects of compensation management – Wage and Salary
administration of managerial and non-managerial personnel. Effort
has been made to cover all topics with their concepts, principles and
techniques which are more significant in this area.
Joseph J. Martocchio (2011)39, Strategic Compensation, this
book is to provide knowledge of the art and science of compensation
practice and its role in promoting companies’ competitive advantage.
Students will be best prepared to assume the roles of competent

37
compensation professionals if they possess a grounded
understanding of compensation practices and the environments in
which business professionals plan, implement, and evaluate
compensation systems. Thus, it is examined the context of
compensation practice, the criteria used to compensate employees,
compensation system design issues, employee benefits, challenges of
compensating key strategic employee groups, and pay and benefits
around the world.
B.D. Singh (2012)40, Compensation Reward Management, this
book contains some additional facts as well as the emerging trends
in compensation and reward management. The practices of some of
the leading corporates have also been incorporated.
Dewakar Goel (2012)41, Performance Appraisal and
Compensation Management: A Modern Approach. This book takes an
in-depth look into the different aspects of performance appraisal and
compensation management that organizations come across every-
day. Written in a lucid and clear language, this book is highly
informative as it covers some of the core problems of management.
The author has covered the entire aspects of these subjects. In
addition to this, he has also covered many practical applications of
the theoretical concepts. This makes it easier for readers to grasp the
theory, and then implement them in actual practice.
It is evident from the above study that there is no extensive
work has been carried out on the topic under reference.

38
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Compensation: Evidence from the Hotel Industry. The Journal
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P. 72-103.
2. Yao-Hung Yang (2013): An Investigation of the Business
Performance and Manager Compensation of Taiwanese Non-
Family-Controlled and Family-Controlled International
Businesses. International Journal of Economics and
Finance. Vol. 5. No. 12. 2013. P. 12-23.
3. Afroja Rehan Rima and Md. Rifayat Islam (2013): A Case Study
on Compensation System Practices in the Perspective of
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39
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14. Nate Holdren (2014): Incentivizing Safety and Discrimination:
Employment Risks under Workmen’s Compensation in the
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15. Abdul Hameed et al. (2014): Impact of Compensation on
Employee Performance (Empirical Evidence from Banking

40
 Sector of Pakistan). International Journal of Business and
Social Science. Vol. 5. No. 2. February 2014. P. 302-309.
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Management. Review of Research. Vol. 3. No. 6. March 2014.
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Bosnia and Herzegovina. Asian Journal of Business
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18. Ofoegbu Onyema (2014): Assessing the Relationship between
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20. Alice Chepkorir Milgo et al. (2014): Reward and Compensation
as a Determinant of Employee Commitment: A Survey of KTDA
Tea Factories in Kenya. European Journal of Business and
Management. Vol. 6. No. 15. 2014. P. 117-126.
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Compensation and Employee Job Satisfaction. Developing
Country Studies. Vol. 4. No. 12. 2014. P. 27-36.
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Management from Islamic Perspective. European Journal of
Business and Management. Vol. 6. No. 17. 2014. P. 37-44.
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CEO Compensation. International Journal of Economics
and Finance. Vol. 6. No. 1. 2014. P. 1-14.

41
24. An Chen (2014): Incentive-Compatible Compensation and
Regulation. Applied Economics. Vol. 46. No. 25. 2014. P.
3074-3081.
25. Knut J. Ims et al. (2014): How Economic Incentives May
Destroy Social, Ecological and Existential Values: The Case of
Executive Compensation. Journal of Business Ethics. Vol.
123. 2014. P. 353-360.
26. Sunil Dutta and Qintao Fan (2014): Equilibrium Earnings
Management and Managerial Compensation in a Multi-period
Agency Setting. Review of Accounting Studies. Vol. 19. 2014.
P. 1047-1077.
27. Jaideep Chowdhary (2014): Impact of Financial Constraint on
Incentive Compensation and Product Market Behavior.
Economics Bulletin. Vol. 34. No. 1. January 2014. P. 115-
124.
28. Sorasak Tangthong (2014): A Causal Model of Compensation
and Benefits and Reward Management on Organizational
Effectiveness of MNCs. Asian Journal of Management
Research. Vol. 5. No. 1. 2014. P. 44-65.
29. Wikil Kwak et al. (2014): Outside Director Compensation in the
Electric Industry. International Journal of Research in
Commerce and Management. Vol. 5. No. 7. 2014. P. 01-05.
30. Lucy Njogu et al. (2014): Executive Compensation
Consequence on Dividend Payout Among Listed Manufacturing
Companies in Kenya. Prime Journal of Business
Administration and Management. Vol. 4. No. 2. 2014.
P. 1364-1370.
31. Marina Riga et al. (2014): Medical Errors in Greece: An
Economic Analysis of Compensations Awarded by Civil Courts
(2000-2009). Open Journal of Applied Sciences. Vol. 4. 2014.
P. 168-175.
32. Tzu-Ching Weng et al. (2014): Equity-based Executive
Compensation, Managerial Legal Liability Coverage and

42
 Earnings Management. Journal of Applied Finance &
Banking. Vol. 4. No. 3. 2014. P. 167-193.
33. Zhou Jie and Zuo Ling Yan (2014): Executive Compensation
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Companies. Advances in Management. Vol. 7. No. 6. June
2014.
34. Er Soni Shyam Singh (2008): Compensation Management,
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Cases, Excel Books, New Delhi .
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37. Mousumi S. Bhattacharya & Nilanjan Sengupta (2009).
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Delhi.
38. S.K. Bhatia (2009): New Compensation Management in
Changing Environment, Deep and Deep Publication Private
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Compensation Management – A Modern Approach, PHI
Learning Private Limited, New Delhi.

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