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

Question

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By tying managers' compensation to the profits of the firm, there is an incentive for them to make decisions that will increase profits in a manner that benefits the firm as a whole, and ultimately reduces agency problems. It aligns the interests of the managers with the shareholders, and there is less chance for conflicts of interest to arise. However, it is important to ensure that the compensation plan is designed in such a way that it does not encourage excessive risk-taking or unethical behavior.

When Managers' Compensation Plans Are Tied in a Meaningful Manner