Given a series of contracts offered to an executive having the same slope (where slope refers to how the contract varies with changes in the firm's gross profits)but different intercepts (referring to the overall generosity of the contract). Which of these is not a consideration in figuring out which of these intercepts the shareholders would decide to build into the contract offered to the executive?
A)if too generous a contract is offered,this comes out of the firm's bottom-line profit.
B)if too generous a contract is offered,the executive may become lazy and not exert the required effort.
C)if the contract isn't generous enough,the executive will decide to work elsewhere.
D)if the contract isn't generous enough,only low-ability executives will apply.

Question

Quizplus · Accepted Answer

The concern about the executive becoming lazy is more related to the structure of incentives rather than the generosity of the contract. The slope of the contract, which is the same for all options, would typically address the incentive to exert effort.

Given a Series of Contracts Offered to an Executive Having