Fundamentals of Financial Management (MindTap Course List)
15th Edition
ISBN: 9781337395250
Author: Eugene F. Brigham, Joel F. Houston
Publisher: Cengage Learning
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Chapter 1, Problem 12Q
Summary Introduction
To identify: The factors that the committee must consider while setting the CEO’s compensation. Whether the compensation must be of dollar or stock or both. The way to measure the performance. The actions of Person X if he is the vice president of some other company.
Compensation Package: The compensation package of the manager should be attractive which inspire them to perform actively. If the compensation package is good, the manager will focus on the maximization of stockholders value. The compensation package should be fair.
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Suppose 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.
Suppose you were a member of Company A’s board of directors and chairperson 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? If “performance” is to be considered, how should it be measured? Think of both theoretical and practical (that is, measurement) considerations. If you were also a vice president of Company A, might your actions be different than if you were the CEO of some other company?
Suppose you were a member of Company X’s board of directors and chairpersonof the company’s compensation committee. What factors should your committeeconsider when setting the CEO’s compensation? Should the compensation consistof a dollar salary, stock options that depend on the firm’s performance, or a mixof the two? If “performance” is to be considered, how should it be measured?Think of both theoretical and practical (that is, measurement) considerations. Ifyou were also a vice president of Company X, might your actions be differentthan if you were the CEO of some other company?
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Fundamentals of Financial Management (MindTap Course List)
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- 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?arrow_forwardIf 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?arrow_forwardChief executive officer compensation can be a material amount andis often scrutinized by regulators, analysts, competitors, and investors. For CEOs of publiclytraded companies, compensation can consist of salary, bonus, stock option grants, or otherstock awards that can be restricted in terms of how long the officers and directors arerequired to hold the stock. The Proxy Statement for the 2012 Annual Meeting for GoldmanSachs reports the following values for 2011 compensation of the chairman and CEO.1. Salary of $2,000,0002. Bonus of $3,000,0003. Restricted Stock Units with a grant date fair value of $10,710,073. The grant date fairvalue is determined based on the closing price-per-share of the common stock onthe NYSE on the date of the grant and includes a 15% liquidity discount to reflectthe transfer restrictions on the common stock.a. Provide at least one audit procedure the auditor would perform to test the chairmanand CEO’s salary. What audit objective is satisfied with this audit…arrow_forward
- Imagine that you are a manager in a large entity and need to make a recommendation to the CEO on which tender to accept. The job being put out to tender by the entity is worth millions of dollars, and you have a significant ownership share in one of the companies tendering. Outline the ethical issues to be consideredarrow_forwardCEO compensation design is effective in controlling the behavior in their decision making. How a compensation package could possibly work in adjusting a CEO’s risk taking behavior (in investments) and in balancing long-term vs. short term interests of a company?arrow_forwardhow do compensation plans, including bonus structures, drive behavior? How can transfer pricing, for example, lead to outcomes that are not in the best interests of the organization? What do you think about executive bonuses tied to stock prices in a public company? What other issues can you see with compensation plans?arrow_forward
- 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.arrow_forwardWhich of the following is not likely to be included in thetypical components of management compensation?a. Company stock options.b. Cash bonuses.c. Free meals.d. Fixed salary.e. Company stock.arrow_forwardHow would the principle that directors may be linked to the performance affect the company's performance in the short term and over the longer term?arrow_forward
- Advise the directors of the company on how the stock control methods and the costing methods can improve the profitability and productivity of the organization.arrow_forwardAssume that you have finished your MBA program and have applied for a position in the FinancialAccounting Department of a large multinational company. The company is struggling with itsaccounting reporting matters and several accounting reports are under regulatory scrutiny. In theinterview board, the recruitment committee members have asked you the following questions. How can you contribute the Financial Accounting Department of this company if youare recruited?arrow_forwardWhat are some ways a board can train their employees to be effective in its financial decision making ?arrow_forward
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