Long-term incentives facilitates the firm's efforts through the board of directors' pay-related decisions to avoid potential agency problems by linking managerial compensation to the wealth of common shareholders.

Question

Quizplus · Accepted Answer

Long-term incentives align the interests of managers and shareholders by linking compensation to long-term company performance. By doing so, it reduces the potential for agency problems between managers and shareholders, which occur when managers pursue their own interests instead of maximizing shareholder value. The board of directors plays a crucial role in making pay-related decisions for executives, and by including long-term incentives, it can ensure that managers are focused on long-term growth and shareholder value creation.

Long-Term Incentives Facilitates the Firm's Efforts Through the Board of Directors