Financial Crisis and Fair Value Accounting

Question: Describe about the Financial Crisis and Fair Value Accounting? Answer: Introduction In 2007-2008 the global economic downturn has emphasized on the role of financial accounting in leading to the financial crisis across the world. Several economist and financial analysis have scrutinized the global financial crisis and expressed significant concern regarding the financial standard, especially the Fair Value Accounting (FVA) which is used as a reporting instrument for the financial organizations. Various studies have demonstrated that Fair Value Accounting is one of the major triggering factors for the global financial crisis. On the other hand, some paper has significantly defended fair value accounting system through highlighting its advantages. Following fair value approach in preparation of financial statements has been a long debated topic in the past few years (Badertscher, Burks and Easton, 2012). Though fair value accounting has several merits, it has been subject to severe criticism in the post global financial crisis era. Several financial institutions have alleged that fair value accounting has played a significant role in leading to the credit crunch. This paper will focus on analyzing the influence of fair value accounting on the global financial crisis through reviewing wide range of literature. Additionally, this paper will also illustrate the advantages as well as disadvantages of the fair value accounting practice. Debate regarding the Role of FVA in Financial Crisis In context of the financial crisis of 2007-2008 and credit crunch, a significant debate on the strengths and disadvantages of the fair value accounting was arisen. The international economy was affected by the severe crisis which was amplified by the significant down fall of the financial markets of the developed countries. In 2007, financial shock was propagated due to the bankruptcy of the mortgage market as the subprime mortgage market of United States was collapsed severely. Prior to the financial crisis, banks had built up huge holdings of the subprime securities as well as mortgages. The financial analysts have concluded that those securities was overestimated as the banks along with the rating organizations have significantly undervalued the level of defaults associated with these securities and mortgages. Additionally, it was observed that the financial institutions had piled up significant exposure to the risky credit and subprime instruments. In 2007- 2008, the prices of th e securities associated to the mortgages gone down significantly. Therefore, the financial institution had to decline their value of assets linked to the subprime mortgages (Barth and Landsman, 2010). During the economic downturn, the value of the financial instruments declined and the firms were forced to sell the securities which made the market more risky and illiquid. Consequently, the financial instruments which were valued at fair value were sold below the fundamental or theoretical value for meeting the requirements of the capital market which led to further drop in the market prices. At this point of time bank had to sell the assets for maintain the required solvency ratio. The financial statements prepared by following the fair value accounting had led to significant uncertainty for the investors and their confidence had declined resulted in further price fall and financial instability. It has been identified that real estate bubble is the major reason behind financial crisis (Benston, 2008). Apart from this, it has been argued that emergence of fair value accounting has led to the financial crisis. The major challenge is to analyze whether introduction of fair value acco unting has significant correlation with the financial crisis or it just coincided with the global financial crisis. According to Laux and Leuz (2010), fair value is one of the major factors for the international economic contraction during 2007 -2008. Additionally, Barth and Landsman (2010) had also expressed the similar idea by accusing fair value accounting as one of key factors for the credit crunch. Some economists and financial analysts have stated that fair value accounting had significantly intensified the negative impact of the financial crisis as it has excessively contributed in leveraging during the boom period. Various studies have partly blamed the adoption of fair value accounting for the credit crisis in US which transformed into the global financial crisis. According to Foster and Shastri (2010), fair value accounting system was adopted by the financial institutions for measuring the assets and liabilities at fair value which has greater relevance in the decision making as reporting of the historical cost may seem irrelevant in most of the time. It has been found that the level of transparency was enhanced by adoption of the fair value accounting (Krumwiede, 2008). However, fair value accounting had received significant criticism from the economists and financial experts. Various studies have depicted that evaluation of most of the assets and liabilities at the fair value when the market was highly volatile led to erroneous valuation. This estimation was used for reporting in the financial statements which was not reliable for the investors. According to Dietrich et al. (2001), fair value has significantly improved the transparency and increased the relevance of the financial statements but it has failed to meet the requirements of reliability criteria. Fair value accounting has declined the level of consistency through distorting the view of the investors regarding the stability and financial performance (Bischof, Daske and Sextroh, 2014). According to Penman (2007), fair value accounting system was accused for integrating the price bubble of the real estate market into the financial statement which influenced the financial institutions for responding to the changes in the market in an abnormal manner. Consequently, fair value accounting significantly contributed in worsening the financial crisis of 2007 2008 (Foster and Shastri, 2010). This is the major reason behind the debated role of fair value accounting in the international financial crisis which was transmitted across the world. According to Trussel and Rose (2009), it will not be possible to deny the fact that fair value accounting practice had led to some issues in the complicated market context. As fair value accounting significantly focused on assigning high level of relevance to the financial information presented in the financial statements of the firms which has assisted in amplification of the economic cycle which contributed to additional volatility of the financial report. Critics have argued that when fair value accounting is applied in case of the illiquid securities, it fails as fair value focuses on both bust and boom which magnified the value of the balance sheets of the banks at the top of cycle (Goncharov and van Triest, 2011). On the other hand, declines those by the same estimate at the bottom. The pro-cyclicality criticism of fair value accounting during the global financial crisis had received highest attention. According to the fair value accounting standard, the entities are allowed to estimate specific liability as well as asset at the fair value at the date of reporting. The changes in the fair value are recognized in terms of loss or gain in the income statement. IASB and FASB have already defined fair value as the amount at which the asset can be exchanged or the liability can be settled. Hence, fair value allows ascertaining the value which can be obtained from the open market transaction. Consequently, market prices have been used instead of historical cost for determining the fair value. Though the accounting professionals have recognized the relevance of the fair value accounting, it has been argued that fair value estimation had played significant role in accelerating the financial. Especially, the banking sector was highly affected by the fair value estimation . The financial institutions have told that during the financial downturn, fair value accounting had forced the companies to recognize the losses which led to the sale of assets. Consequently, the economic position was further degraded. According to the President of the American Bankers Association, there are various factors which triggered the financial crisis and the fair value accounting is responsible for exacerbating the issues during the downturn (American Bankers Association, 2009). Additionally, it as has been argued that the fare value accounting for the financial instruments in the banks have led to extensive credit expansion. FVA has contributed in the excessive leverage in the boom market as well as write down of the asset was overestimated at the time of bust. According to Wallison (2008), fair value is the major factor for accelerating the financial turmoil due to the overestimation of the financial instruments which misguided the investors as well as forced the banks to sell their assets (Rashad Abdel-Khalik, 2010). On the other hand, some economists and the financial analysts have argued that fair value accounting has no direct association with the financial crisis. According to Barth and Landsman (2010), the perceived pro-cyclicality of fair value accounting is not responsible for enhancing the severity of the financial crisis of 2007 - 2008. It has been argued that it only holds in case of bank asset or in the case where fair value is applied at the time of determining impairment. It has been observed that most of the bank holding companies asset is not carried at the fair value in the financial statement (Paolucci and Menicucci, 2014). Additionally, when fair value accounting is applied, the model completely differs from the pure mark to the market accounting. According the studies undertaken by Shaffer (2010) and Laux and Leuz (2010), fair value accounting cannot be blamed for the global financial crisis. The studied shave demonstrated that the insignificant evidence is found for supporting the fact that fair value accounting forced the banks to write own their assets. On the other hand, International Monetary Fund (2008), has agreed on the fact that fair value accounting approach make the impacts of economic volatility on the balance sheet but it has been also found that under specific risk management framework, air value account has the potential to intensify the cyclical movements in the values of asset and liability. Apart from the concerns regarding the measurements difficulties, risk along with pro-cyclicality, FVA provides a measure which best reflects the present condition of a financial institution. Scrutinizing the literatures it can be found various studies have identified that fair value accounting played a significant role in amplifying the negative impact on the financial market at the time of economic downturn. Some researchers and economist have argued that fair value accounting has accelerated the financial crisis and significantly contributed in closing the ferocious circle of the asset fire sales. In contrast, some economists have argued that international financial crisis was led by the poor risk management practice and wrong credit grant decisions made by the financial institutions. Hence, the fair value accounting does not play a major role in enhancing the impact of financial crisis. During the economic downturn, fair value accounting has focused on reflecting the market condition in the balance sheet of the financial institution (Paolucci and Menicucci, 2014). From the wide range of literature, it can be found that the fair value accounting cannot be considered as the main reason behind the financial instability. Benefits of Fair Value Accounting Fair value accounting provides lot of advantages by considering the market value and enhancing the relevance of the information. Principle benefits of fair value accounting in relation to enhancing the quality of financial information are provided in this section: Accuracy and Transparency In fair value accounting, the financial information is presented considering the present market value instead of the historical cost. One of the major objectives of fair value accounting is to provide accurate information to the stakeholders (Okamoto, 2014). The internal control procedure of the organization must focus on reflecting actual market condition. Thus, adoption of fair value leads to estimation of the asset and liabilities in the current market and reporting those in the financial statement. Different valuation models are used for estimation of the asset and liabilities of the organization which ensures accurate and transparent information (Magnan, 2009). Enhanced Relevance It has been found that use of the present market value in reporting the assets and liabilities help in enhancing the relevance of the financial information presented in the balance sheet. In case of historical accounting the assets and liabilities are reported at the value of the acquiring date. Adoption of fair value accounting has enabled the organization to compare the assets and liabilities in different time period as those are valued at current price (Khurana and Kim, 2003). True Income Fair value accounting has limited the capability of the company in manipulating the net income presented in the financial statement. It has been observed that sometimes, the management purposely facilitate sale of assets to enhance or decline the net gain from the gain or loss from the sale proceeds. Drawbacks of Fair Value Accounting Though fair value accounting significantly contribute in enhancing the transparency and relevance of the financial information, it has some limitations. It has been observed that fair value accounting worsen the impact of economic downturn (Lilien, Sarath and Schrader, 2013). Analyzing wide range of literature some major disadvantages of fair value accounting has been identified and those will be discussed in this section. Value Reversal It has been observed that fair value accounting poses challenge to the organization as the market condition is reflected in the financial information. It has been observed that the market may become highly volatile and adoption of fair value accounting leads to reevaluation of the assets and liabilities in thee volatile condition. Consequently, significant swings in the value of the assets and liabilities are observed. However, in the stabilized market, the value of the assets and liabilities get back to the normal level. Thus, temporary loss and gain is reported which often mislead the investors (Kusano, n.d.). Market Effect Various studies have depicted that use of fair value accounting can significantly affect the market at the time of economic downturn. At the time of global financial crisis, the value of the assets were re-estimated and as it considered the current market condition, the value of the assets were estimated to be very low (Liao et al., 2013). Additionally, it is evident that the lower value of asset forced the organization to sell assets. This results further devaluation of assets and thus fair value accounting significantly contribute in worsening the impact of economic downturn (LaCalamito, 2013). Conclusion: This paper has provided an insight to the perspective of different economists and financial analysts regarding the role of fair value accounting practice in the global financial crisis 2007- 2008. It has been observed that various researcher have argued that fair value accounting reflected the economic downturn in the financial information which has devaluated the asset and forced the banks to sell assets so that the solvency requirement is met. Consequently it led to further financial instability across the world. Thus, fair value accounting has amplified the negative impact of financial crisis. On the other hand, some economists have argued that the global financial crisis was triggered by the poor risk management structure along with the wrong credit grant decision making. Hence, fair value accounting has no direct association with the global financial crisis. This paper has also discussed the major benefits of FVA such as improved accuracy, transparency and relevance. Moreover, f air value accounting does not allow the organization to manipulate the net income. In contrast, the drawbacks of the fair value accounting have been observed which destabilizes the market due to reflection of the market situation at the time of economic downturn. References American Bankers Association (2009). Fair Value and Mark to Market Accounting. Retrieved from:https://www.aba.com/Issues/Issues_FairValue.html Badertscher, B., Burks, J. and Easton, P. (2012). A Convenient Scapegoat: Fair Value Accounting by Commercial Banks during the Financial Crisis.The Accounting Review, 87(1), pp.59-90. Barth, M. and Landsman, W. (2010). How did Financial Reporting Contribute to the Financial Crisis?.European Accounting Review, 19(3), pp.399-423. Barth, M. E. Landsman, W. R. (2010). How did Financial Reporting Contribute to the Financial crisis?, European Accounting Review, 19(3), 399-423. doi: 10.1080/09638180.2010.498619 Benston, G. (2008). The shortcomings of fair-value accounting described in SFAS 157.Journal of Accounting and Public Policy, 27(2), pp.101-114. Bischof, J., Daske, H. and Sextroh, C. (2014). Fair Value-related Information in Analysts Decision Processes: Evidence from the Financial Crisis.Journal of Business Finance Accounting, 41(3-4), pp.363-400. Foster, P. B. Shastri, T. (2010). The subprime lending crisis and reliable reporting, Accounting Auditing, CPA Journal, 80(4), 22-25. Goncharov, I. and van Triest, S. (2011). Do fair value adjustments influence dividend policy?.Accounting and Business Research, 41(1), pp.51-68. International Monetary Fund (IMF) (2008). Fair Value Accounting and Procyclicality, in International Monetary Fund (IMF), Global Financial Stability Report, Financial Stress and Deleveraging. Macro-Financial Implications and Policy, International Monetary Fund, Washington DC, 105-130. Khurana, I. and Kim, M. (2003). Relative value relevance of historical cost vs. fair value: Evidence from bank holding companies.Journal of Accounting and Public Policy, 22(1), pp.19-42. Krumwiede, T. (2008). The role of fair-value accounting in the credit-market crisis, International Journal of Disclosure and Governance, 5(4), 313-331. Kusano, M. (n.d.). Fair Value Accounting and Procyclicality: Accounting for Securitization.SSRN Journal. LaCalamito, T. (2013). Fair value accounting's role in the recent financial crisis.International Journal of Economics and Accounting, 4(3), p.271. Laux, C. and Leuz, C. (2010). Did Fair-Value Accounting Contribute to the Financial Crisis?.Journal of Economic Perspectives, 24(1), pp.93-118. Liao, L., Kang, H., Morris, R. and Tang, Q. (2013). Information asymmetry of fair value accounting during the financial crisis.Journal of Contemporary Accounting Economics, 9(2), pp.221-236. Lilien, S., Sarath, B. and Schrader, R. (2013). Normal Turbulence or Perfect Storm? Disparity in Fair Value Estimates.Journal of Accounting, Auditing Finance, 28(2), pp.192-211. Magnan, M. (2009). Fair Value Accounting and the Financial Crisis: Messenger or Contributor?.Accounting Perspectives, 8(3), pp.189-213. Okamoto, N. (2014). Fair value accounting from a distributed cognition perspective.Accounting Forum, 38(3), pp.170-183. Paolucci, G. and Menicucci, E. (2014). Critical Insights Back Into the Role of Fair Value Accounting within the Financial Crisis.International Journal of Business and Social Science, 5(8), pp.80-97. Penman, S. H. (2007). Financial reporting quality: Is fair value a plus or a minus?, Accounting and Business Research, Special Issue: International Accounting Policy Forum, 33-44. doi: 10.1080/00014788.2007.9730083 Rashad Abdel-Khalik, A. (2010). Fair Value Accounting and Stewardship*.Accounting Perspectives, 9(4), pp.253-269. Shaffer, S. (2010). Fair Value Accounting: Villian or Innocent Victim. Exploring the Links Between Fair Value Accounting, Bank Regulatory Capital and the Recent Financial Crisis, Working Paper, No. QAU10-01, Federal Reserve Bank of Boston Trussel, J. M. Rose, L. C. (2009). Fair value accounting and the current financial crisis, Accounting Auditing, CPA Journal, 79(6), 26-30.

Boise Automation free essay sample

Rob Allison, senior accountant manager at for Boise Automation, has lost an order of $1. 2 million from Northern Paper. There are various things which he could have done differently while approaching Northern Paper for this order to design, supply and install an automated control system for its wood-chip handling system. Â  Price Analysis The initial price offered by Boise was $1. 35 million. According to Jason Li from Northern, this price was approximately 30% more than the price offered by the lowest priced contender. Assuming that this contention is true, the lowest price offered by competition was $0. 945 million. Considering that the initial price offered by Boise was at a 20% premium, the cost price of the automation system can be calculated as $1. 08 million. This means that it was not possible for Boise to lower its price to match the lowest price offered by the competition, without suffering losses. 2. Decision Making Unit Rob was not able to identify correctly who the key decision maker was, in the selling process. We will write a custom essay sample on Boise Automation or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page Identifying the roles played by different people in a DMU is critical to the selling process. Rob incorrectly identified Mr. Jennings as a decider and tried to cultivate a close customer relationship with him and most of his subsequent decisions were based on the feedback received by him from Mr. Jennings. He failed to understand that Mr. Jennings was an outsider and the final decision was to be taken by the Rocky Falls team. Identifying the Participants in the Buying Process In a competitive B2B market, Boise must propose a compelling business value proposition to Northern Paper Inc. o that it can command a high price premium. Boise needs to target the finance department of Northern to show the advantages of the better technology it offers and its benefits in financial terms. The finance department was a critical influencer in this case as it gave the final approval of the budget. On a higher budget, Boise can get its own product specifications in the bidding process eliminating competition with older and cheaper technologies. The table below shows the role played by Norther n Paper personnel in the buying process. Source: Marketing Management: Philip Kotler) 2. Overcoming Buying Pressure The buying center had repeatedly emphasized on the importance of competitive pricing as an important premise for arriving at a final decision. Since Boise was not in a position to offer the lowest price, there were various ways in which price pressure from the buyer could be circumvented: ? Life Cycle Cost: It was important to make Northern understand the added benefit of buying the Boise system over competition in terms of life cycle cost. Boise could project its offering as having a greater economic life than that of its competitors, since it had better and newer features which would take longer in becoming obsolete. ?Benchmarking: The competitive products which match the minimum technical specifications set by Northern should be set as a benchmark and then Boise should make Northern understand the added value of new feature it provides over and above the benchmark. ?Solution Selling: Boise can work out a process improvement model with Northern where the new features available in the Boise system can be used to improve process time which will reduce costs for Northern.

How Managers Should Treat Employees

Introduction Increased productivity is a major goal for all organizations and companies. This is especially the case in the current economic environment where a lot of competitive forces exist and each business has to look for means to avoid being forced out of the market. The management of an organization is critical in ensuring that the goals of increased productivity are met.Advertising We will write a custom research paper sample on How Managers Should Treat Employees specifically for you for only $16.05 $11/page Learn More Managers are the individuals who are charged with the important task of organizing the human resources of an organization to ensure growth and development (Pugh Hickson, 2007). However, these managers have to work through employees so as to accomplish organizational goals. It is therefore in the best interest of the manager to ensure that the employees are successful in their tasks. Invariably, they act in differing ways in their quest to get increase employee productivity. While some are aggressive and stern, others are caring and set out to command the respect of their employees. Each approach used by the manager has different outcomes since the manner in which managers treat their employees affects the output obtained from them. This paper will set out to demonstrate that a manager who is considerate and respectful to his employees will get higher productivity than one who engages in aggressive behavior towards his staff. The paper will also suggest leadership styles and other approaches that managers can use to increase employee productivity and therefore aid in the increased profitability of the organization. Effects of Aggression on Employees Positive effects Aggressive behavior by the manager can at times yield in improved employee performance. This is because such behavior will prompt the employees to act in a desirable manner. For example, a manager can make use of negative consequences so as to mo dify the behavior of his employees to what he/she sees as desirable. This desirable behavior will ideally result in higher productivity for the organization. Fournies (1999) reveals that punishments work since employees will be keen to decrease the frequency of the behavior that brings about the negative consequence. People who receive negative consequences become more apprehensive and are therefore more likely to avoid making future mistakes. The manager will also benefit from using punishments since other employees are less likely to engage in the behavior that brought about punishment to their co-worker.Advertising Looking for research paper on business economics? Let's see if we can help you! Get your first paper with 15% OFF Learn More Fournies (1999) asserts that it is sometimes necessary for the manager to be strict and uncompromising with his staff. Such a stance might be necessary when the manager is fulfilling Fayol’s commanding role which is the proc ess of â€Å"maintaining activity among the personnel in order to obtain the optimum returns from the employees (Pugh Hickson, 2007, p.145). In this role, the best results are achieved if the manager is able to push his staff to work according to set schedules. The manager might find it necessary to be strict and stern so as to obtain the best results. Being stern may also be productive when the manager wishes to express the severity of a situation. Negative Effects Using punishments will decrease the frequency of the behavior that is causing the punishment (which is undesirable) to the employees. However, using punishments to modify the behavior of employees may have some negative repercussions. Fournies (1999) demonstrates that punishments may cause employees to react aggressively by holding work back, causing disruptive actions or even sabotaging work performance. These actions by the employees will be aimed at reducing performance and therefore injuring the boss or his/her rep utation. Fournies (1999) suggests that instead of using punishments to modify employee behavior, it would be more beneficial to use positive reinforcement to increase the desirable employee behavior. Managers who display aggressive, belittling and blaming behavior towards the employees under their command obtain devastating effect. Research indicates that such behavior results in increased job dissatisfaction and it might also lead to high turnover rates among employees. In addition to this, employees engage in deviance behavior which is primarily aimed at hurting the reputation of the aggressive boss. Donaldson-Feilder, Lewis and Yarker (2011) go on to reveal that aggressive behavior by managers results in a range of psychological outcomes such as anxiety, depression, burnout and somatic health complaints in the employees. Such outcomes further reduce the performance of the employees and therefore reduce the overall productivity of the organization. Effects of Considerate Treatment Genuine concern for the employees by the manager will increase the productivity of the workers significantly. Research by Kellerman (2007) demonstrated that when managers showed concern for their staff, the staff reciprocated by increased productivity. The reason for this is that all employees at some point experience levels of stress and even de-motivation as they carry out their work.Advertising We will write a custom research paper sample on How Managers Should Treat Employees specifically for you for only $16.05 $11/page Learn More When the manager shows concern, the employees feel that he/she can identify with their circumstances. They will therefore be more willing to be guided by such a manager and work hard to achieve the set goals and objectives. Another considerate treatment that the manager can use to increase employee productivity is to show consideration for work-life balance. Employees suffer from conflicts between work and non-work respo nsibilities with such conflicts resulting in stress and burnout. Donaldson-Feilder et al. (2011) reveals that stress and overwork are increasing in prevalence among today’s workforce. Anderson et al. (2002) demonstrates that stress and burnout result in cognitive difficulties and lead to decreased performance of the employees. Work-life balance has therefore gained great significance since this stress and overwork has a negative impact on the productivity of the workers. Research indicates that provision of work-life practices has the potential of generating positive attitudes by the employees towards the manager and by extension the organization (Donaldson-Feilder et al., 2011). When employees perceive that the manager is treating them fairly, the social exchange theory explains that they will feel obliged to reciprocate by engaging in behavior that is beneficial to the manager. They will therefore be more willing to increase performance and therefore achieve set organizatio nal goals. Approaches for increasing production Managers are tasked with marshalling the organizations’ resources to accomplish some goals and it is therefore imperative that they be able to make sure that their employees have a high degree of motivation in their performance. Motivation is defined by Martocchio (2005) as â€Å"the process of arousing, directing and maintaining behavior towards a goal† (p.22). An important point to consider is that motivations should not only be restricted to monetary benefits. While it is true that money is the core motivating factor for many employees, there are other important aspects that employees look at.Advertising Looking for research paper on business economics? Let's see if we can help you! Get your first paper with 15% OFF Learn More Donaldson-Feilder, et al. (2011) suggests that many employees are also concerned about their professional growth. A manager who considers this will take on a mentoring role to the employee and also ensure that the employees are provided with schedules that improve and encourage growth. Managers should also engage in regular evaluations of the performance of their employees. These evaluations should be aimed at improving the productivity of individual employees. It is therefore critical for the manager to provide feedback on the evaluations to the staff. Moss and Sanchez (2004) reveal that the manner in which the manager delivers feedback determines whether it will aid or hinder improvement. While failures are bound to be observed in employees, this should be seen as learning opportunities. The manager should therefore try to capture and reveal to the employee the lesson behind any failure (Moss Sanchez, 2004). The manager should ensure that there are set performance standards which the employees should seek to achieve. Performance evaluations should then be measured by these set standards as opposed to comparing employees’ performances against each other. Donaldson-Feilder et al. (2011) note that there are times when a manager may feel overwhelmed and fail to control their negative emotions to the team. In such a situation, it is crucial for the manager to be honest and communicate with the employees what happened. Even more important is that the manager should have the capacity to take responsibility and apologize for their behavior. Apologizing for poor behavior will show employees that the manager is willing to take responsibility for his actions and it will reestablish the perceived integrity of the manager. Many performance problems are blamed on poor communication between managers and employees. Communication is critical for the success of all relationships and its prominence in organizations cannot be over emphasized. Lack of communication by ma nagers may cause low levels of morale among the staff (Fournies, 1999). This is especially the case when there are increased levels of uncertainty about what is going on in the organization. Through open and regular communication, the manager can boost the level of confidence that employees have in the organization and therefore foster positive attitudes. Most managers only talk to their employees when they are issuing instructions or when the employees have done something wrong. This makes it hard for employees to know when they have done a good job since the manager does not provide any feedback at such times. The level of engagement that employees have to the organizations is determined by communication. Kellerman (2007) demonstrates that managers who communicate to their employees on a frequent basis foster followers who are passionately committed and deeply involved in the organizational affairs. Managers should make use of motivating language so as to increase employee job sat isfaction and performance. Leadership Styles for Increasing Productivity A leadership approach that would be beneficial for increasing employee performance is transformational leadership. This style is highly favored by many Western nations and the transformational leader looks for â€Å"potential motives in followers, seeks to satisfy higher needs, and engages the full person of the follower† (Harris Nelson 2007, p.356). A manager who practices transformation leadership is able to not only steer the followers towards achieving set goals but also identify with their needs and concerns both at the job and outside. Such a manager is able to show consideration to his followers. This will require the manager to take on the role of a considerate leader that is; one who is able to show concern and respect for his followers. Donaldson-Feilder et al. (2011) articulate that this kind of leaders is able to look out for the welfare of his staff and express appreciation and support for their efforts. This leadership behavior is associated with many positive employee outcomes including: higher job satisfaction, reduced burnout and tension and most importantly, increased performance and productivity. In addition to this, research indicates that considerate behavior by managers has been consistently linked with improved employee well-being. The transactional leadership approach can also assist the manager to obtain superior results from his employees. Harris and Nelson (2007) define this form of leadership as one where the interaction between leaders and subordinates is characterized by a transactional exchange of rewards for services. The manager is about to offer rewards such as promotions, granting favors, and continued employment in exchange for continued good performance by the employee. This approach helps the manager to get the most out of employees since it clarifies to the staff what is expected of them (Harris Nelson, 2007). However, the manager should ens ure that the set goals are tangible, verifiable, and measurable. If the manager sets goals that are too aggressive, the employees will be discouraged and may therefore not even try to reach them. Creating Boundaries While it is important for the manager to establish a good relationship with the staff, it is important for work boundaries to be set. Without boundaries, the employees may fail to afford the manager the respect that is required for his/her to fulfill his managerial duties effectively. Donaldson-Feilder (2011) suggests that boundaries can be established by ensuring that employees follow protocol when they wish to bring up issues with the manager. In addition to this, the manager should be afforded the authority that comes with his position with the organization. In disputes between or among employees, the manager should act as the dispute handler. Conflicts are a reality in all environments where people are working together. Martocchio (2005) declares that while contentio us issues are bound to occur in all organizations, the way in which these conflicts are handled may influence the future success or failure of the organization. A manager who is skilled at conflict resolution will be able to reconcile fighting employees and therefore ensure that disputes do not hamper productivity. Conclusion The success of an organization depends on the productivity of its workforce. With this consideration, this paper set out to discuss how managers should treat employees so as to get more productivity from them. This paper has conclusively shown that managers who are aggressive and use punishment to try and increase performance from their employees fail. Instead, managers who establish relationships with their employees and make use of positive reinforcement are more successful in getting increased productivity. Transformational leadership and transactional leadership have been highlighted as two leadership styles that can be used to increase performance from emp loyees. The workplace is full of many stressful situations and an understanding and considerate manager will motivate his employees to increase their performance. The paper has underscored the important role that communication plays in motivating employees. By applying the approaches highlighted in this paper, the manager can increase employee performance and therefore achieve the desirable goal of increased organization productivity. References Anderson, S., Coffey, B. Byerly, R. (2002). Formal organizational initiatives and informal workplace practices: Links to work-life conflict and job-related outcomes. Journal of Management, 28(6), 787-810. Donaldson-Feilder, E., Lewis, R. Yarker, J. (2011). Preventing stress in organizations: how to develop positive managers. Boston: John Wiley Sons. Fournies, F.F. (1999). Coaching for improved work performance. NY: McGraw-Hill Professional. Harris, T.E. Nelson, M. (2007). Applied organizational communication: theory and practice in a glo bal environment. London: Taylor Francis. Kellerman, B. (2007). What Every Leader needs to know About Followers. Harvard Business Review, 85(12), 84-91. Martocchio, J. J. (2005). Research in personnel and human resources management. Washington: Emerald Group Publishing. Moss, S.E. Sanchez, J.I. (2004). Are your employees avoiding you? Managerial strategies for closing the feedback gap. Academy of Management Executive, 18 (1), 34-54. Pugh, D. Hickson, J. (2007). Great writers on organization. NY: Ashgate Publishing, Ltd. This research paper on How Managers Should Treat Employees was written and submitted by user Harvey Cole to help you with your own studies. You are free to use it for research and reference purposes in order to write your own paper; however, you must cite it accordingly. You can donate your paper here.