The Board of Directors of CamCell, Inc., wishes to design a CEO compensation plan that will align the personal interests of the CEO with the interests of the shareholders in long-term firm performance. The Board wishes the CEO to take more short-term risks in order to achieve potentially higher long-term returns. Consequently, the Board has decided on an incentive plan that involves payout based on the firm's performance five years in the future. CamCell is presently searching for a new CEO. Which of the following statements is true?

Question

Quizplus · Accepted Answer

The incentive plan involves payouts based on the firm's performance five years in the future, which requires the CEO to take short-term risks for potentially higher long-term returns. This creates personal risk for the CEO, which may require over-compensation to offset that risk and attract candidates for the CEO position. Option A is incorrect because there is no evidence to suggest that the plan will be attractive to CEO candidates. Option C is incorrect because there is no information to support that institutional investors disapprove of long-term executive incentive plans. Option D is incorrect because this type of plan should not cause the CEO to underinvest in R&D as the focus is on long-term firm performance.