When managers' compensation plans are tied in a meaningful manner to the profits of the firm, agency problems:

Question

Quizplus · Accepted Answer

Tying managers' compensation plans to the profits of the firm incentives them to make decisions that benefit the firm as a whole, which reduces the likelihood of agency problems arising. Therefore, option A is the best choice. While it is not realistic to expect that agency problems will be entirely eliminated, this approach reduces their impact. Option B and C are incorrect because they suggest that the compensation plans will create or shift agency problems to other stakeholders, which is not the case.

When Managers' Compensation Plans Are Tied in a Meaningful Manner