A company's board thinks it needs to reward top management for advancing the company's aims. The board decides on bonuses based on share price rises at the end of each year. Bonuses will be given in shares that managers can keep or sell. What are the ramifications of such a bonus scheme?
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- If a company’s board of directors wants management to maximize shareholder wealth, should the CEO’s compensation be set as a fixed dollar amount, or should the compensation depend on how well the firm performs? If it is to be based on performance, how should performance is measured? Would it be easier to measure performance by the growth rate in reported profits or the growth rate in the stock’s intrinsic value? Which would be the better performance measure? Why?If a company’s board of directors wants management to maximize shareholder’s wealth, should the CEO’s compensation be set as a fixed amount, or should the compensation depend on how well the firm performs? If it is based on performance, how should performance be measured? Would it be easier to measure performance by the growth rate in reported profits or the growth rate in the stock’s intrinsic value? Which would be the better performance measure? Why?In developing a compensatory share option plan, a company's objective is to motivate executives and employees to manage the company in a way that increases stock price. to decrease employee turnover. to enhance compensation packages without having to expend cash. to do all of these options.
- A good way to align the incentives of a CEO with those of shareholders is to make his pay directly related to earnings (or cash flows) per share (EPS), since an increase in earnings always leads to an increase in shareholder value. True or FalseAn executive compensation scheme might provide a manager a bonus of $1,000 for every dollar by which the company’s stock price exceeds some cutoff level. In what way is this arrangement equivalent to issuing the manager call options on the firm’s stock?Which of the following actions would be likely to reduce potential conflicts of interest between stockholders and managers? a. A firm's compensation system is changed so that managers receive larger cash salaries but fewer long-term options to buy stock. b. The company changes the way executive stock options are handled, with all options vesting after 2 years rather than having 20% of the options awarded vest every 2 years over a 10-year period. c. The composition of the board of directors is changed from all inside directors to all outside directors, and the directors are compensated with stock rather than cash. d. The company's outside auditing firm is given a lucrative year-by-year consulting contract with the company. e. Congress passes a law that severely restricts hostile takeovers.
- Discuss the advantages and disadvantages of the following forms of managerial compensation in terms of mitigating agency problems, that is, potential conflicts of interest between managers and shareholders.a. A fixed salary.b. Stock in the firm that must be held for five years.c. A salary linked to the firm’s profits.Mr. Ang is a member of the board of directors. He will be given a bonus if he can increase the share price by 20% at the end of the fiscal year. Which of the following would LEAST LIKELY BE be a manifestation of bias by Mr. Ang?a. Management letter to the stockholders stating the qualitative improvements on the businessb. Increase in operating cash inflowc. Increase in accrued income and accounts receivablesd. Increased media coverage to paint a better picture of the entityWhich one of the following forms of incentives is NOT based on absolute performance? Stock options Bonus awarded upon achievement of share price target "Industry CEO of the year" prize Bonus awarded upon achievement of sales target
- Suppose the compensation committee for a corporation is preparing to hire a new CEO and debating which of two pay packages to offer. Package A includes an annual salary of $1 million plus 1000 shares of stock. Package B also has a salary of $1 million, but has 10,000 options to purchase the company at its current price of $50. a) Draw a graph showing the relationship between the CEO’s total compensation (vertical axis) and the stock price (horizontal axis) for the two pay schemes. Clearly label the two compensation methods in your graph. b) Discuss how a switch from the stock to stock option plan would alter CEO behavior. c) Discuss how a switch from the stock to stock option plan would affect the type of CEO that would be willing to accept the job.With respect to the shareholder/manager relationship, which of the following statements is FALSE? a. The managerial salary package should include an incentive component b. Executive stock options do not have expiration dates and are held in perpetuity c. Executive stock options tend to be issued out-of-money d. Performance shares can be used to align manager/shareholder interestsSuppose you were a member of Company X’s board of directors and chairman of the company’s compensation committee. What factors should your committee consider when setting the CEO’s compensation? Should the compensation consist of a dollar salary, stock options that depend on the firm’s performance, or a mix of the two? 3.If “performance” is to be considered, how should it be measured? Think of both theoretical and practical (that is, measurement) considerations.
