Check Your Understanding
Chapter 1: Problems 2, 3, 6
Chapter 2: Problems 1, 5, 6
Explain several dimensions of the shareholder-principal conflict with manger-agents known as the principal-agent problem. To mitigate agency problems between senior executives and shareholders, should the compensation committee of the board devote more to executive salary and bonus (cash compensation) or more to long-term incentives? Why? What roles does each type of pay play in motivating managers?
When making decision on whether to devote more to executive salary and bonus (cash compensation) or more to long-term incentives, it is important to determine the cost of each decision. The compensation committee of the board should devote more to executive salary and bonus with some stipulation in the performance of the job that is being performed. This could influence executives, as well as managers, to perform at a higher standard.
In order to boost motivation among managers, it would be wise to use cash compensation because this would be an incentive that can be utilized by the managers as they see fit for their personal life. This could be incorporated as part of whatever strategic plan that is fitting for the marginal goal of the company. In addition, there could be more long-term incentives which would include granting more stock or deferred stock options in the organization. This type of incentive could possibly cause the employees to perform at a different level because they are invested in the company and if the company does well it would create wealth for them too.
Corporate profitability declined by 20 percent from 2008 to 2009. What performance percentage would you use to trigger executive bonuses for that year? Why? What issues would arise with hiring and retaining the best managers?
If corporate profitability declined by 20 percent from 2008 to 2009, the...