Much of the outcry in the 2008 fight over a fat bailout for Wall Street focused on the size of Wall Street's fat paychecks. The real problem, according to corporate governance researchers, isn't the amount executives receive, it's how companies pay them. Most companies link compensation to quarterly performance, encouraging short-term gambles. One way to align pay with long-term incentives and discourage risky bets would be to stretch compensation over more years. What is a suggested solution to the principal-agent problem?

Question

Quizplus · Accepted Answer

Compensating employees with long-term contracts aligns their incentives with the long-term success of the company, rather than just quarterly performance. This can discourage risky short-term bets and reduce the principal-agent problem. Employee ownership and incentive pay may also be effective in certain contexts, but are not mentioned as suggested solutions in the given text. Employee monitoring is not directly related to aligning incentives and reducing the principal-agent problem.

Much of the Outcry in the 2008 Fight Over a Fat