In order to reduce agency problems,managers may be provided compensation that includes
A) a fixed salary so managers' pay is not at risk, allowing managers to focus on the company's business.
B) a bonus based on the level of profit achieved during the year.
C) an option to buy the company's stock.
D) incentive pay for achieving higher sales than last year.

Question

Quizplus · Accepted Answer

Providing managers with the option to buy the company's stock aligns their interests with those of the shareholders, as they will benefit financially if the company performs well in the long term. This reduces agency problems as it incentivizes managers to make decisions that benefit the company as a whole, rather than just their own personal interests. Fixed salaries (option A) may not motivate managers to perform at their best, while bonuses (option B) and incentive pay (option D) may encourage short-term decision making that prioritizes immediate profits over long-term growth.

In Order to Reduce Agency Problems,managers May Be Provided Compensation