Question 1

All of the following are advantages of bonus-plan incentives except ________.

Accepted Answer

Bonus-plan incentives are generally seen as positive because they can be easily adjusted (revocable), tied to financial performance, and linked with customer satisfaction. However, a disadvantage is that they may encourage a short-term bias, where employees focus on short-term gains at the expense of long-term goals.

Question 2

The type of compensation that some boards think is better at truly aligning the incentives of managers with those of shareholders is a(n) ________.

Accepted Answer

Restricted stock grants tie the compensation of managers to the performance of the company's stock, as the grants only vest if certain goals or targets are met. This aligns the incentives of managers with those of shareholders, as both parties want to see the stock price increase. Bonuses, raises, and mixed compensation portfolios may also be effective at incentivizing performance, but they do not have the same direct link to stock price as a restricted stock grant.

Question 3

_____ stock ownership guidelines establish ownership through a multiple-of-salary approach.

Accepted Answer

Traditional stock ownership guidelines generally establish ownership through a multiple-of-salary approach, where an executive is required to hold a certain number of shares based on a multiple of their salary. This approach is commonly used to align the financial interests of executives with the long-term success of the company.

Question 4

_____ are sometimes used to alleviate problems caused by potential conflicts of interest between shareholders and CEOs.

Accepted Answer

Incentives such as stock options or performance-based compensation can align the interests of shareholders and CEOs, as the CEO's financial success becomes tied to the company's success. Buyouts, mergers, and acquisitions do not necessarily address conflicts of interest between shareholders and CEOs.

Question 5

Stock ownership guidelines are usually grouped into two types: traditional programs and ________.

Accepted Answer

Traditional programs and retention programs are the two types of stock ownership guidelines. Traditional programs focus on the acquisition of stock by employees, while retention programs are designed to encourage employees to hold onto their stock for a certain period to align their interests with those of the company and its shareholders.

Question 6

_____ programs express ownership as a percentage of the gains resulting from the exercise of stock options and other equity-based incentives, such as restricted stock.

Accepted Answer

Retention programs, such as equity-based incentives, often express ownership as a percentage of the gains resulting from the exercise of stock options and restricted stock. This is designed to incentivize employees to stay with the company and work to increase the value of the company's stock.

Question 7

When professional managers, rather than the owners of a firm, run the firm's operations, situations can arise in which there may be ________.

Accepted Answer

When professional managers rather than owners run a firm, conflicts of interest can arise because the goals of the managers may not always align with the interests of the owners. Managers might prioritize their personal career advancement or compensation over the company's profitability or long-term success, leading to decisions that benefit them but not necessarily the owners or shareholders.

Question 8

Landing highly paid CEOs as directors will probably lead to a board that will be supportive of ________.

Accepted Answer

Landing highly paid CEOs as directors indicates that the board will have individuals who are knowledgeable and supportive of high executive compensation. Therefore, Choice A (paying high wages for CEOs) is the best choice. The other options (globalization, mergers and acquisitions, and stringent internal monitoring) may or may not be priorities for the board, as they are not necessarily correlated with the presence of highly paid CEOs as directors.

Question 9

All of the following are possible incentive alignment mechanisms except ________.

Accepted Answer

The answer of All of the following are possible incentive...

Question 10

Provisions in managers' compensation packages that offer significant bonuses when loss of employment is a consequence of an acquisition is known as a golden ________.

Accepted Answer

Provisions in managers' compensation packages that offer significant bonuses when loss of employment is a consequence of an acquisition is known as a golden parachute. A golden handshake usually refers to a generous severance package given to an employee upon leaving a company, while a buyout refers to one company purchasing another. A safety net is a general term that refers to any measures taken to prevent financial loss or hardship.

Question 11

_____ do not make executives bear any financial risk.

Accepted Answer

The answer of _____ do not make executives bear any...

Question 12

The two most common types of incentive compensation programs that reward executives and align the interests of top-management teams with those of shareholders are stock options and ________.

Accepted Answer

The question asks for the most common type of incentive compensation programs that align the interests of top-management with shareholders. While stock options are a common form of incentive compensation, the other options (commissions, employee discounts, and paid vacations) do not align executives' interests with shareholders. Annual bonus plans, however, have become increasingly common in recent years and are often tied to company performance metrics, thereby aligning executives with shareholder interests.

Question 13

Which of the following statements is not a problem associated with executive ownership?

Accepted Answer

Risk seeking behavior is not necessarily a problem associated with executive ownership. It may even be desirable in some situations as long as it is balanced with a measured approach to risk management. However, A, C, and D are all commonly recognized problems associated with executive ownership.

Question 14

When board members are asked why they would invest the required time and effort in another firm's success, they often respond that it is because of the ________ component.

Accepted Answer

Board members often participate in other firm's success because of the learning component. They believe that serving on another company's board can provide valuable insights and experiences that can be applied to their own organization.

Question 15

One of the fundamental conditions that leads to a potential agency problem in publicly held companies is the separation of firm ownership from ________.

Accepted Answer

The separation of firm ownership from company management is the main condition that can lead to an agency problem. As shareholders are the owners of a publicly held company, they entrust their investments to company managers who are responsible for making strategic decisions to maximize shareholder value. However, the interests of managers may not always align with those of shareholders, and managers may act in their own best interests rather than in the best interests of shareholders. This separation of ownership and management creates an agency problem.

Question 16

The agency problem that can occur between managers and shareholders is sometimes solved by performing ________.

Accepted Answer

Incentive alignment, also known as aligning the interests of managers with those of shareholders, is a common solution to the agency problem. This can be achieved through methods such as stock options, performance-based compensation, and bonuses tied to strategic goals. It helps to ensure that managers act in the best interests of the shareholders and the overall company. Audits, mergers or acquisitions, and restructuring can also have a positive impact on addressing the agency problem, but they are not always effective or feasible solutions.

Question 17

Executives with large proportions of their pay package derived from stock options tend to pursue aggressive ________ strategies.

Accepted Answer

Stock options provide executives with a financial incentive to increase the stock price, often through mergers and acquisitions or divestitures. This aligns with an aggressive acquisition and divestiture strategy.

Question 18

Some research shows that bonus plans can lead to ________.

Accepted Answer

The answer of Some research shows that bonus plans can...

Question 19

The rationale for the use of stock options is that they motivate executives to ________ and take reasonable risks that result in the company's stock price increasing.

Accepted Answer

Stock options provide the recipients with an incentive to act like owners by linking their rewards to the performance of the company's stock price. Therefore, they are motivated to make decisions that will increase the company's overall value and profitability, which will benefit the shareholders.

Question 20

When a firm ties an executive's bonus payouts to long-term performance of the firm rather than to annual performance of the firm, it is instituting long-term ________ plans.

Accepted Answer

Long-term plans that tie executive bonuses to the performance of the firm over a longer period of time are typically incentive plans. Financial plans may involve things like budgeting or capital expenditures, performance plans may include metrics for individual employee performance, and competency plans focus on training and development of employees. None of these options specifically address long-term executive compensation tied to firm performance.

Quiz 13: Corporate Governance in the Twenty-First Century