A technique for dealing with the principal-agent problem is to:
A) require managers to purchase shares of stock in the firm.
B) establish a profit-sharing plan for managers.
C) establish year-end bonuses based on the profits of the firm.
D) all the above.
E) none of the above.

Question

Quizplus · Accepted Answer

Requiring managers to purchase shares of stock in the firm aligns their interests with those of the shareholders, as they will benefit financially from the success of the company. Establishing a profit-sharing plan gives managers an incentive to increase the profits of the firm, as they will directly benefit from any increase in profits. Year-end bonuses based on profits similarly provide an incentive for managers to focus on increasing the profitability of the firm. All of these methods can help mitigate the principal-agent problem by aligning the interests of managers with those of the shareholders.

A Technique for Dealing with the Principal-Agent Problem Is To