The optimal level of sensitivity of a manager's compensation to the firm's performance depends on the manager's level of risk aversion.

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The optimal level of sensitivity of a manager's compensation to the firm's performance is dependent on various factors, and one of the most critical factors is the manager's level of risk aversion. If the manager is risk-averse, then their compensation should be less sensitive to the firm's performance. This is because they would prefer a more stable income rather than a variable one that is based on the firm's performance. On the other hand, if the manager is risk-seeking, then their compensation should be more sensitive to the firm's performance since they would prefer a higher income that is directly correlated to the firm's success. Therefore, the level of sensitivity of a manager's compensation to the firm's performance is dependent on the manager's level of risk aversion.

The Optimal Level of Sensitivity of a Manager's Compensation to the Firm's