Question 4. Pay-for-performance is the basis of optimal contracting theory yet the managerial power approach claims...

Question 4.
Pay-for-performance is the basis of optimal contracting theory yet the managerial
power approach claims the relationship between executive pay and firm performance
has decoupled and is broken. Discuss.

Solutions

Expert Solution

OPTIMAL CONTRACTING THEORY

Optimal contracting model describes the compensation for executives. As per this approach, the compensation is purely based on the performance of executives. That's why it is known as pay-for-performance approach. The optimal contract rewards the the good performance of the executives in an organisation. But the compensation of executives is seemed to be deviated from optimal contracting model. Because executives have substantial influence over their compensation. Managerial Power Approach discusses about it.

MANAGERIAL POWER APPROACH

As per this approach, the executive compensation is considered to be excessive when it is compared with the efficient compensation contract. The given statement is that Managerial Power Approach claims the relationship between executive pay and firm performance has decoupled and is broken. It means that there is no relationship between the executive pay and their performnace. The executives who are paid high may not be the top performers. MPA is not consistent with optimal contracting theory. This approach states that the executive compensation is a result of managerial power. MPA establishes a positive relationship between compensation and power.

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

According to the ‘optimal contracting’ theory Executive compenstaion is one solution to the agency problem between...

According to the ‘optimal contracting’ theory Executive compenstaion is one solution to the agency problem between managers and shareholders. Critically discuss the agency problem in light of the agency theory and discuss how optimal contracting theory views managers’ pay arrangements as a (partial) remedy to the agency problem. According to the ‘optimal contracting’ theory Executive compenstaion is one solution to the agency problem between managers and shareholders. Critically discuss the agency problem in light of the agency theory and discuss...

Making managerial pay contingent on measures of managerial and/or firm performance motivates them to deliver good...

Making managerial pay contingent on measures of managerial and/or firm performance motivates them to deliver good performance for shareholders. However, it also burdens them with greater risks than they may like. How do organisations balance these two considerations when choosing managerial pay and performance measures?

The residual dividend policy approach is based on the theory that a company’s optimal distribution policy...

The residual dividend policy approach is based on the theory that a company’s optimal distribution policy is a function of its target capital structure, the investment opportunities available to the firm, and the availability and cost of its external capital. The firm makes distributions to its shareholders based on its residual earnings. Consider the following example: Smith & Jones Company is expected to generate $1,800,000 in net income over the next year. Smith & Jones Company has forecasted a capital...

The most widely accepted theory of foreign exchange rate determination is purchasing power parity, yet it...

The most widely accepted theory of foreign exchange rate determination is purchasing power parity, yet it has proven to be quite poor at fore- casting future spot exchange rates. Why? Please try to meet 450 words, thank you so much!

Standard labor market theory predicts that firms will not pay for worker general training, yet empirical...

Standard labor market theory predicts that firms will not pay for worker general training, yet empirical studies suggest that, in fact, they do.  Explain why standard theory predicts that firms will not pay for general training.  Explain why empirical studies might find that firm do, in fact, pay for general training, and explain what this implies about what the most appropriate theoretical model for the labor market.

Designing a Managerial Incentives Contract Specific Electric Co. asks you to implement a pay-for-performance incentive contract...

Designing a Managerial Incentives Contract Specific Electric Co. asks you to implement a pay-for-performance incentive contract for its new CEO and four EVPs on the Executive Committee. The five managers can either work really hard with 70 hour weeks at a personal opportunity cost of $200,000 in reduced personal entrepreneurship and increased stress-related health care costs or they can reduce effort, thereby avoiding the personal costs. The CEO and EVPs face three possible random outcomes: the probability of the company...

QUESTION 5 The best approach to forecasting future performance is to focus only on the company's...

QUESTION 5 The best approach to forecasting future performance is to focus only on the company's past earnings. True False QUESTION 8 Management's choice of accounting methods and accrual estimates will not affect valuations based on earnings and book values. True False 4 points QUESTION 9 Abnormal Earnings arise when a company is able to produce earnings that exceed the expected rate of return on equity. True False QUESTION 14 Strategy analysis provides a critical understanding of a company's...

Question 7 XYZ Ltd which has a system of assessment of Divisional Performance on the basis...

Question 7 XYZ Ltd which has a system of assessment of Divisional Performance on the basis of residual income has two Division, Alfa and Beta. Alfa has annual capacity to manufacture 15,000,000 numbers of a special component that it sells to outside customers, but has idle capacity. The budgeted residual income of Beta is GHS12,000,000 while that of Alfa is GHS10,000,000. Other relevant details extracted from the budget of Alfa for the current years were as follows. Sale (outside customers) ...

I have asked this question 4 times and no one has done it right yet!!!!! PLEASE...

I have asked this question 4 times and no one has done it right yet!!!!! PLEASE HELP ME I need a Risk Management Plan for a made up supply chain company. This should be several pages including: 1 INTRODUCTION.. 1 1.1 Purpose Of The Risk Management Plan. 1 2 risk management Procedure.. 1 2.1 Process. 1 2.2 Risk Identification. 1 2.3 Risk Analysis. 1 2.3.1 Qualitative Risk Analysis. 1 2.3.2 Quantitative Risk Analysis. 1 2.4 Risk Response Planning. 1 2.5 ...

Question 4: Explain the effect on transfer prices on: The performance evaluation of buying and...

Question 4: Explain the effect on transfer prices on: The performance evaluation of buying and selling divisions. The selling division managers’ incentives to sell goods either internally or externally.

Subjects