Which one of the following actions is the best example of an agency problem?
A) Paying management bonuses based on the number of store locations opened during the year.
B) Paying management bonuses based on the current market value of the ﬁrm's stock.
C) Accepting a project that enhances both management salaries and the market value of the ﬁrm's stock.
D) Requiring stockholders approval of all management compensation decisions.
E) Basing management bonuses on the attainment of speciﬁc ﬁnancial goals.

Question

Quizplus · Accepted Answer

Paying management bonuses based on the number of store locations opened during the year creates an agency problem because it incentivizes management to pursue growth at the expense of profitability and long-term sustainability. This could lead to excessive risk-taking and an emphasis on short-term gains instead of maximizing shareholder value.

Which One of the Following Actions Is the Best Example