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 University Finally yet important, I wish to avail myself of this opportunity, express a sense of gratitude and love to my beloved parents for their support, strength and encouragements NGO THI KIEU VUI THE EFFECT OF MONETARY INCENTIVE ON EFFORT AND TASK PERFORMANCE: A STUDY OF VIETNAMESE COMPANY By NGO THI KIEU VUI October 2011 Supervisor: Dr Le Van Lien ABSTRACT 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 ACKNOWLEDGEMENT ABSTRACT TABLE OF CONTENTS LIST OF FIGURES LIST OF ABBREVIATIONS INTRODUCTION 1.1 1.1.1 Monetary incentive in the world 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 Background of study Organization of research 15 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 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 3.7 Sample techniques 44 Limitations 44 FINDINGS AND ANALYSIS 46 4.1 4.1.1 Hypothesis 48 4.1.2 Hypothesis 50 4.1.3 Hypothesis 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 Test for Hypotheses 48 Overall discussion from managers and accountants interviews 61 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 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 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 10 Susan M Healthfield, About.com, “What People Want from Work”, Available at: http://humanresources.about.com/od/rewardrecognition/a/needs_work.htm on 19th April 2011 [Accessed 19 September, 2011] The Associated Press (2005), “Ex-WorldCom Accountant Says She was told to Falsify Entries”, Available at: http://www.nytimes.com/2005/02/03/business/03ebbers.html [Accessed 19 September, 2011] The World Bank (2010), “Extreme Poverty Rate Continue to Fall”, Available at: http://data.worldbank.org/news/extreme-poverty-rates-continue-to-fall [Accessed 19 September, 2011] Tim Smith (2005), “Motivating through Monetary Incentives”, Available at: http://www.wiglafjournal.com/selling/2005/09/motivating-through-monetary-incentives/ [Accessed 19 September, 2011] U.S Securities and Exchange Commission (2007), “SEC Charges Additional Former Officers of Nortel Networks Corporation in Financial Fraud Scheme”, Available at: http://www.sec.gov/news/press/2007/2007-182.htm [Accessed 19 September, 2011] Valli (2009), “10 Major Accounting Scandals”, Available at: http://bizcovering.com/history/10-major-accounting-scandals/ [Accessed 19 September, 2011] Law on Enterprises (2005) Available at: http://www.vietnamlaws.com/freelaws/Lw60na29Nov05Enterprises[10Apr06].pdf [Accessed on 25 September, 2011] 75 Walter Jack Duncan,Linda E Swayne,Peter M Ginter (1998), “Handbook of Health Care Management”, Blackwell Publishers, p438, Available at: http://books.google.com.vn/books?id=mrKZ3Baz6kC&pg=PA438&lpg=PA438&dq=(1)+ability,+(2)+personal+situation+and+work +environment,+and+(3)+motivation&source=bl&ots=7EKYDok40a&sig=hbpeiM97aV RkPREvcBH6IEFGLX4&hl=vi#v=onepage&q=(1)%20ability%2C%20(2)%20personal %20situation%20and%20work%20environment%2C%20and%20(3)%20motivation&f= false [Accessed 19 September, 2011] Watts, R., and J Zimmerman, "Positive Accounting Theory: A Ten Year Perspective," The Accounting Review 65, 1990, pp 131-156 Wendel Clark (2011), “Financial Factors That Motivate Employees”, Available at: http://www.ehow.co.uk/info_8065778_financial-factors-motivate-employees.html [Accessed 19 September, 2011] Wendy Pan (2008), “Definition of Motivation”, Available at: http://ezinearticles.com/?Definition-of-Motivation&id=1567108 [Accessed 19 September, 2011] Wendy Pan (2011), “Definition of Motivation”, Available at: http://ezinearticles.com/?Definition-of-Motivation&id=1567108 [Accessed 19 September, 2011] Wilson, Jacob (2005) Hull’s Quantitative Equation on Human Performance Journal of Hyperplasia Research 76 Wojtek Dabrowski (2008), “CHRONOLOGY: Key dates in Nortel’s accounting scandal”, Available at: http://www.reuters.com/article/2008/06/19/us-nortel-chargeschro-idUSN1936265020080619 [Accessed 19 September, 2011] Word IQ.com (2011), “Incentive – Definition”, Available at: http://www.wordiq.com/definition/Incentive [Accessed 19 September, 2011] Zmijewski, M., and R Hagerman, "An Income Strategy Approach to the Positive Theory of Accounting Standard Setting/Choice," Journal of Accounting and Economics 3, 1981, pp 129-149 77 APPENDIX A: QUESTIONNAIRE SURVEY PATTERN Profile of Respondents Company: _ Sector:  Commercial Banking Age:  21-30 Gender:  31-40  Male  Manufacturing Goods  41-50  Service  Above 50  Female How long have you worked?  Less than year  1-5 year  5-10 years  More than 10 years Questionnaires Does your company have any remunerate policy in the circumstances that you have to work overtime, high intensity, high achievements or increasing share prices? Yes No If yes, please continue: Is your no.1 priority when working in the current company high salary and monetary incentive? Yes No Do you move to another company if they pay you much higher salary and monetary incentive? Yes No Do you put higher effort in performing the true and fair financial statements if the company pays monetary incentive commensurate with your input? 78 Yes No Which actions could you involve if the company does not pay monetary incentive commensurate with the effort you put into work or even you feel unfair treatment among coworkers? (Can choose more than one answer)  Move to another company which is better payments  Put less effort and attention in preparing the financial statements  Manipulating accounting data goes against the company’s best interest  Choosing accounting methods goes against the company’s best interest  Others _ Given the opportunity, regardless of how much monetary incentive, you collude with accountants/ managers in manipulating accounting data to be beneficial for you? Yes No Given the opportunity, regardless of how much monetary incentive, you choose accounting policies to be beneficial for you? Yes No Additional personal comments (option): _ _ _ _ _ _ _ QUESTIONS USED IN INTERVIEWS 1) Under your view, what is monetary incentive? Which type of monetary incentive you like most? Why? 2) As the long experienced accountant/ manager, you think Vietnamese companies will benefit from utilizing monetary incentive to motivate managers and accountants in particular and other workers generally on effort and task performance? 79 3) Do you think monetary incentive is a good motivational tool in encouraging managers/ accountants in performing the true and fair of the financial statement? 4) How you assess about the use of monetary incentive in boosting managers and accountant on performance in Vietnamese companies now? 5) How you think about the future of using monetary incentives in Vietnam? 80 APPENDIX B: STATISTICAL TEST To test the hypothesis developed in the study, the Chi-squared test is used to investigate any association between two different sets of observations This test can test the actual number of people that answered a particular value and compare it to the expected or “random” value, where each value has an equal chance of appearing The results of all questions in each survey are aggregated to test the hypothesis to generate overall decision Test Hypothesis : The purpose of work of managers and accountants is mainly due to money and they are motivated on performance by monetary incentive Test statistic: Degree of freedom: = (the rule of five is applied) Level of significant: α = 0.05 Decision rule: Reject if Value of the test statistic: Yes 21-30 No Total 28 36 81 31-40 70 17 87 41-50 52 17 69 Above 50 33 21 54 Total 183 63 246 Yes No Total 21-30 26.78049 9.21951 36 31-40 64.71951 22.28049 87 41-50 51.32927 17.67073 69 Above 50 40.17073 13.82927 54 Total 183 63 246 Value of 28 26.78049 1.21951 1.48721 0.05553 70 64.71951 5.28049 27.88355 0.43084 52 51.32927 0.67073 0.44988 0.00876 33 40.17073 -7.17073 51.41939 1.28002 9.21951 -1.21951 1.48721 0.16131 82 17 22.28049 -5.28049 27.88355 1.25148 17 17.67073 -0.67073 0.44988 0.02546 21 13.82927 7.17073 51.41939 3.71816 6.931562062 Conclusion: Since , does not reject 83 Test Hypothesis : Regardless of how much monetary incentive, when there is an opportunity, managers and accountants will act opportunistically Test statistic: Degree of freedom: = (the rule of five is applied) Level of significant: α = 0.05 Decision rule: Reject if Value of the test statistic: A B C D E Total Less than year 6 4 25 1-5 years 7 27 5-10 years 18 14 19 25 81 More than 10 years 11 14 17 54 Total 40 38 41 53 15 A= Move to another company that can pay you higher monetary incentive B= Put less effort and attention in performing the financial statements C= Manipulating accounting data goes against the company's best interest D= Choosing accounting methods goes against the company’s best interest E= Others 187 84 A B C D E Total Less than year 5.34759 5.08021 5.48128 7.08556 2.00535 25 1-5 years 5.77540 5.48663 5.91979 7.65241 2.16578 27 5-10 years 17.32620 16.45989 17.75936 22.95722 6.49733 81 More than 10 years 11.55080 10.97326 11.83957 15.30481 4.33155 54 Total 40 38 41 53 15 A= Move to another company that can pay you higher monetary incentive B= Put less effort and attention in performing the financial statements C= Manipulating accounting data goes against the company's best interest D= Choosing accounting methods goes against the company’s best interest E= Others 187 The expected value should be at least 5.0 to ensure that the chi-squared distribution provides an adequate approximation of the sampling distribution In this contingency table, there are some cells have expected values of less than 5.0, there is need to combine column to satisfy the rule of five Thus, “choosing accounting methods goes against the company’s best interest” column and “others” column is combined So, and will be as follow: A B C D&E Total Less than year 6 25 1-5 years 7 27 5-10 years 18 14 19 30 81 More than 10 years 11 14 20 54 85 Total 40 38 41 68 A= Move to another company that can pay you higher monetary incentive B= Put less effort and attention in performing the financial statements C= Manipulating accounting data goes against the company's best interest D= Choosing accounting methods goes against the company’s best interest E= Others 187 A B C D Total Less than year 5.34759 5.08021 5.48128 9.09091 25 1-5 years 5.77540 5.48663 5.91979 9.81818 27 5-10 years 17.32620 16.45989 17.75936 29.45455 81 More than 10 years 11.55080 10.97326 11.83957 19.63636 54 Total 40 38 41 68 A= Move to another company that can pay you higher monetary incentive B= Put less effort and attention in performing the financial statements C= Manipulating accounting data goes against the company's best interest D= Choosing accounting methods goes against the company’s best interest E= Others 187 Value of 5.34759 0.65241 0.42563 0.07959 5.77540 1.22460 1.49964 0.25966 18 17.32620 0.67380 0.45400 0.02620 11.55080 -2.55080 6.50659 0.56330 5.08021 0.91979 0.84601 0.16653 86 5.48663 1.51337 2.29029 0.41743 14 16.45989 -2.45989 6.05107 0.36763 11 10.97326 0.02674 0.00071 0.00007 5.48128 -1.48128 2.19420 0.40031 5.91979 -1.91979 3.68558 0.62259 19 17.75936 1.24064 1.53919 0.08667 14 11.83957 2.16043 4.66745 0.39422 9.09091 -0.09091 0.00826 0.00091 9.81818 -0.81818 0.66942 0.06818 30 29.45455 0.54545 0.29752 0.01010 20 19.63636 0.36364 0.13223 0.00673 3.47012 Conclusion: Since , not reject 87 Test Hypothesis : The purpose of work of managers and accountants is mainly due to money and they are motivated on performance by monetary incentive Test statistic: Degree of freedom: = (the rule of five is applied) Level of significant: α = 0.05 Decision rule: Reject if Value of the test statistic: Yes No Total Male 47 23 70 Female 58 36 94 Total 105 59 164 Yes No Total Male 44.81707 25.18293 70 Female 60.18293 33.81707 94 88 Total 105 59 164 47 44.81707 2.18293 4.76517 0.10632 58 60.18293 -2.18293 4.76517 0.07918 23 25.18293 -2.18293 4.76517 0.18922 36 33.81707 2.18293 4.76517 0.14091 Value of 0.515635366 Conclusion: Since , does not reject 89 ... 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. .. 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. .. 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’