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Managerial Economics: Applications, Strategy and Tactics 12th Edition by James McGuigan, Charles Moyer, Frederick Harris
Edition 12ISBN: 9781439079232Managerial Economics: Applications, Strategy and Tactics 12th Edition by James McGuigan, Charles Moyer, Frederick Harris
Edition 12ISBN: 9781439079232 Exercise 2
Explain several dimensions of the shareholder-principal conflict with manageragents 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 role does each type of pay play in motivating managers
Explanation
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Shareholders seek to maximize profits in the long-run. On the other hand, managers seek attractive perks along with job security. Since, return is positively related to risk, managers try to avert risk which the shareholders might want the manager to undertake. So to motivate managers not to avoid taking risk, compensation committee could place a greater weight on long-term incentives such as options and stocks.
Further if all the compensation is paid in cash, then the managers would be interested in only undertake low-risk projects and avoid undertaking high-risk but high-valued projects.
Further if all the compensation is paid in cash, then the managers would be interested in only undertake low-risk projects and avoid undertaking high-risk but high-valued projects.
Managerial Economics: Applications, Strategy and Tactics 12th Edition by James McGuigan, Charles Moyer, Frederick Harris
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