By tying a manager's compensation to the performance of the firm relative to that of its competitors, corporate stockholders and directors create incentives that tend to resolve the
A) possibility of bankruptcy.
B) hidden agenda scenario.
C) principal-agent problem.
D) firm's opportunity costs.

Question

Quizplus · Accepted Answer

The principal-agent problem arises when the interests of the principals (owners or shareholders) and agents (managers) diverge. Tying a manager's compensation to the firm's performance relative to its competitors aligns the interests of the managers with those of the shareholders, thereby mitigating the principal-agent problem.

By Tying a Manager's Compensation to the Performance of the Firm