The Board of Directors of Beeline, Inc. has decided to base the salary of its ﬁnancial manager entirely upon the market share of the ﬁrm. Accordingly,
A) The ﬁrm may incur some agency costs since the manager will be focused on the market share of the ﬁrm rather than acting to maximize earnings.
B) The ﬁnancial manager will always act in the best interest of the shareholders since all agency costs have been eliminated through salary incentives.
C) This arrangement may be unnecessary, since the goal of the ﬁrm is to maximize earnings for shareholders, and that is most likely accomplished through larger market share.
D) The manager may not act to maximize the current value of the ﬁrm's stock, resulting in agency costs for the ﬁrm's stockholders.
E) The ﬁrm will incur some agency costs if the manager acts to maximize market share.

Question

Quizplus · Accepted Answer

By basing the financial manager's salary solely on market share, the manager may prioritize increasing market share over maximizing the current value of the firm's stock. This can result in agency costs for stockholders as their interests are not being fully represented. Therefore, choice D is the best answer.