Which of the following statements about share-based managerial compensation is correct?
A) It may cause dysfunctional behaviour in the short-run as managers try to drive up the company's share price.
B) Exercising the option as soon as it is granted will leave the manager better off from a cash standpoint.
C) Share options are always guaranteed to increase in value over time.
D) Managers always prefer to receive share options instead of year-end bonuses.

Question

Quizplus · Accepted Answer

Share-based managerial compensation may incentivize managers to engage in short-term strategies that drive up the company's share price, even if they are detrimental to the long-term health of the company. This can be detrimental in the long run.

Answer: B 
 Exercising the option as soon as it is granted is not always the best option for a manager. The value of the shares may increase over time, and waiting to exercise the option until the stock price rises can leave the manager with more cash in the long run.

Answer: C 
 It is not guaranteed that share options will increase in value over time. The value of stock options is contingent on the performance of the company and the stock market as a whole.

Answer: D 
 Managers may have different preferences for their compensation package, and some may prefer year-end bonuses instead of share options or vice versa. It depends on the manager's risk appetite and personal financial situation. So, this statement is not always true.

Which of the Following Statements About Share-Based Managerial Compensation Is