Question

Conduct and critically analyze compensation policy based on information below.

You have been employed as the Chief Financial Advisor (CFA) for Safer Investment Corporation. You replace the former CFA as it was found he has not been generating the desired returns for the company and investors. You are managing an Endowment Fund and a Retirement Fund. Investors are looking to earn above average returns on their investments. These investors have no insurance coverage and have not started to do any estate planning. The age distributions for the investors are as follows:

Age                                    # of clients

28-30                                      425

31-50                                      775

51-65                                      300

65+                                          175

Your salary is a combination of basic salary + commission. Commission is based on whether the company and investors achieve the desired return. The salary structure fits your profile as you have built up a reputation as being an aggressive financial advisor who seeks to make everyone happy at all cost.

QUESTION:

Conduct and critical analysis of this compensation policy to include any ethical considerations. Develop a new policy framework for the company. What recommendation will you make?

Answer 1

Conduct and critical analysis of this compensation policy to include any ethical considerations.

The compensation framework should be structured in such a way that all conflicts of interest should be removed in the principal-agent dynamics.

The variable part of the compensation should be rethought on as it involves a conflict of interest of the executive.

In this case rational agents would try to maximize personal utility.

Other ethical benefits should be added to the compensation structure like House Rent allowance, Leave Travel Allowance, Provident Fund, Mobile expenses as well as Dearness Allowance.

Develop a new policy framework for the company.

As the provided data suggests that:

Highest number of policy holders fall in age group of 31-50 years (775).

Second highest policy holders are in the age group of 28-30 years (425).

These two age segments should be tapped more aggressively as their premium paying tenure is much higher that the people falling in age group of above 50 years.

Also, the target segment of 24-30 years should be devised as an average individual starts saving from the age of 24 years. For this a separate marketing plan should be devised to improve their understanding of the benefits of the policy.

The age group of 51-65 are having 300 policy holders who would be maturing to policy attainment age in the next 10 year on an average hence there is need to improve the number of policy subscribers in the age group below 50 years to have enough float to support the expenses in a financially profitable manner.