How accounting affect stock price Essay Example | Topics and Well Written Essays - 500 words

How accounting affect stock price - Essay Example Unexpected good accounting performance has a significant effect on CEO’s pay for a short time. However, on long-term basis, the trend reverses, and the pay starts decreasing and thus the benefits accrued evens out. However, in the compensation using the stock price performance, a good stock price translates into increased CEO salary, which on the long-run maintains the rise. Accounting performance is arrived at by an aggregate evaluation of all the subunits of the firm. Acquiring all the required information in computing the aggregate departmental performance is a tedious exercise that takes quite a considerable amount of time. A poor performance in one department is likely to negatively affect the other entire firm. Thus, to ensure a high performance level, the CEO must focus on an increasing performance of all the departments of the firm. Accounting performance is very useful when issuing promotions to various departmental managers and supervisors. The best performing managers and supervisors, and the ones who have maintained an upward trend are awarded with promotions, but not the best method to use in determining a CEO’s compensation. A firm could register an upward growth for a number of years, but assume an upward diminishing growth. This phenomenon occurs when the firm achieves its maximum growth, where all resources are utilized to the optimum. At this point, the firm cannot grow anymore since all its resources are fully utilized. The growth thus becomes stagnant. A CEO who is compensated using this method will start receiving decreasing remuneration as the firm’s performance starts decreasing. In contrary to the accounting performance, the stock prices method does not reach a maximum growth level. A CEO who works hard to achieve growth of the firms’ stock prices has no limit to the level at which they can