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With respect to the shareholder/manager relationship, which of the following statements is FALSE?
The managerial salary package should include an incentive component
Executive stock options do not have expiration dates and are held in perpetuity
Executive stock options tend to be issued out-of-money
Performance shares can be used to align manager/shareholder interests
Step by step
Solved in 2 steps
- Which of the following statements is CORRECT? Select one: a. Conflict of interest between shareholders and managers is not possible. b. By definition, the agency problem can only take place in corporations but not in proprietorships and partnerships. c. Conflict of interest between shareholders and bondholders is not possible. d. Managers always work to maximize the long-run value, and therefore the price, of their company stocks. This is exactly what shareholders desire.a controller argues that when a company issues stock for less than current value, the value of preexinting stockholders shares is diluted. Is this allowed and right at employee compensation ?Which 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
- Compensation at Nonpublic Companies The executive compensation programs of thelargest public companies often include the types of equity-based compensation such as stockoptions and performance shares described in this chapter. Smaller nonpublic companies oftenhave the same types of strategic goals and want to provide the same types of compensationplans but do not have the equity types of compensation to offer because they do not have publicly traded stock.Required:1. What is the primary advantage of equity-based compensation such as stock options and performanceshares?a. It is easier to administer than flat salary or performance-based cash payments.b. Short-term stock prices cannot be influenced inappropriately by executives.c. It aligns managers’ incentives (to increase value) with those of the shareholders.d. It is more consistent with generally accepted accounting procedures than other forms of compensation.2. What types of compensation can nonpublic companies offer that would…A corporation whose managers are separate from its owners will face zero agency costs when it uses stock options as part of its compensation package for upper managers True FalseWhich of the following statements is FALSE? In the shareholder/debtor relationship, the: a. Debtor is the principal, because they have delegated authority to management b. Shareholder and debtor interests are increasingly aligned as the company takes on more debt. c. Interests of the firm’s management tend to be aligned more closely with those of the firm’s shareholders d. Shareholders have an incentive to take on risky projects because they get to keep residual earnings of the firm a. Interests of the firm’s management tend to be aligned more closely with those of the firm’s shareholders b. Shareholders have an incentive to take on risky projects because they get to keep residual earnings of the firm c. Debtor is the principal, because they have delegated authority to management d. Shareholder and debtor interests are increasingly aligned as the company takes on more debt.
- Explain several dimensions of the shareholder-principal conflict with manager agents known as the principle-agent problem. To mitigate agency problems between senior executives and shareholders, should the board's compensation committee devote more to executive salary and bonus (cash compensation) or more to long-term incentives? Why? What role does each type of pay in motivating managers?a. How does the offering of stock options to CEOs attempt to align CEO incentives with shareholder incentives?b. Enron was a company that was ruined in part because of the stock options offered to upper management. Explain.c. In addition to accounting reforms, how might stock options be changed to try to prevent situations like what happened at Enron from occurring in the future?Which of the following does not help align managerial and shareholder incentives? Question options: a) Market for Corporate Control b) Product Market Competition c) Antitrust Law d) Corporate Law e) Markets for Directors
- Which of the following statements is NOT correct about the rights granted to common stockholders? Group of answer choices a. Stockholders may transfer their right to vote to a second party by means of a proxy. b. Dividends due to common stockholders are cumulative. c. Common stockholders have the right to elect a firm's directors. d. In large, publicly traded firms, managers typically have some stock but their personal holdings are generally insufficient to win voting control.Which one of the following factors may affect stock return but out of the CEO's control?This chould potentially be a problem when trying up the compensation scheme to stock returns/ A.Supply chain risk management B.Federal monetary policy and regulations C.The rival firm recruits the company's employees D.Tte high inflation rate announced in the last quaterWhich of the following methods would be most likely to decrease the agency problems by helping motivate managers to act in the best interests of shareholders? 1. Increase the proportion of executive compensation that comes from stock options and reduce the proportion that is paid as cash salaries. 2. Eliminate a requirement that members of the board of directors have a substantial investment in the firm's stock. 3. Decrease the use of restrictive covenants in bond agreements. 4. Take actions that reduce the possibility of a hostile takeover. 5. Elect a board of directors that allows managers greater freedom of action.
