Johan, a corporate manager, often takes significant business and financial risks because of the company's compensation structure, which provides him with a comfortable base salary and large bonuses when the business does well.Johan does not suffer in any way when the company performs poorly, even if the performance is a result of his decisions.What is the term that describes this situation?

Question

Quizplus · Accepted Answer

Moral hazard occurs when one party takes risks because they know they will not have to bear the full consequences of their actions. In this case, Johan is incentivized to take significant risks due to the structure of his compensation, knowing that he does not suffer the consequences if those risks lead to poor company performance.

Johan, a Corporate Manager, Often Takes Significant Business and Financial