Residual income can mitigate the problems of goal incongruence.

Question

Quizplus · Accepted Answer

Residual income is a performance metric that measures the profitability of an investment center by deducting the cost of capital from its operating income. This aligns the goals of the managers with those of the company's shareholders since their income depends on the return on investment they generate, which is higher than the minimum required rate of return. Therefore, managers are encouraged to pursue profitable projects that create long-term value for the company instead of short-sighted decisions that boost immediate profits at the expense of future performance. This can reduce the conflicts between the interests of different stakeholders and enhance the overall performance of the organization.

Residual Income Can Mitigate the Problems of Goal Incongruence