Which of the following mechanisms would be most likely to help motivate managers to act in the best interests of shareholders?
A) Decrease the use of restrictive covenants in bond agreements.
B) Take actions that reduce the possibility of a hostile takeover.
C) Elect a board of directors that allows managers greater freedom of action.
D) Increase the proportion of executive compensation that comes from stock options and reduce the proportion that is paid as cash salaries.
E) Eliminate a requirement that members of the board of directors have a substantial investment in the firm's stock.

Question

Quizplus · Accepted Answer

Increasing the proportion of executive compensation that comes from stock options and reducing the proportion that is paid as cash salaries will align the interests of managers with those of the shareholders, as they will receive financial rewards only if the company's stock price increases. This can motivate managers to act in the best interests of shareholders, as they will benefit directly from the success of the company.

Which of the Following Mechanisms Would Be Most Likely to Help