In early March 2020, a pair of activist investors purchased over 10% of shares outstanding in...

In early March 2020, a pair of activist investors purchased over 10% of shares outstanding in Big Lots Inc., a discount retailer which has recently experienced weak returns. The investors hire you to advise on executive compensation and governance practices. Describe the conflict of interest which often arises between owners and management and suggest how this may be addressed via executive compensation

Expert Solution

The conflict of interest often arises in the corporation because owners are often separat from the management and normally in these circumstance conflict arises which is known as agency problem. Mangers are appointed on behalf of the shareholders and are supposed to act in the best interest of the shareholders but it is often seen that management are more focussed on short term goals to maximise their incentive even if it comes at the cost of owner. The agency problem is a problem where when a principal appoints and agent who is supposed to act in the best interest of the princiapl but often some action of the agent conflict with the best interest of the principal. In this case the mangers are the agents and the shareholders are the princiapal. When the activist investor purchased 10% stock of the company they can recommend to the board of directors that executive compensation should consist of fixed as well as variable component. The fixed component should not exceed more than 70% to 75% of the total compensation and variable compensation should be aligned with the performance of the company and how much value has been created for the company and its shareholders. The variable component can be with reference to the growth and strategic initiative of the company or the profitability of the company.

jeff jeffy answered 2 years ago

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