Briefly explain how the design of management compensation can affect conflicts of interest (i.e., agency problems)...

Briefly explain how the design of management compensation can affect conflicts of interest (i.e., agency problems) between managers and stockholders.

Expert Solution

Question summary : Effect of Management compensation Design on AGency problems between managers and stockholders.

Answer :

Agency problem between managers and stockholders is the problem of conflict of interest i.e. actually managers or employees of a company are supposed to act in the interest of the stockholders but most of the time they act in their own interest. This causes loss to the companies. This is agency problem

Agency problem is caused to to a FIXED COMPENSATION SYSTEM which was traditinally followed in organisations. In this case, employees are paid a fixed salary every month and they do not participate in the prosperity of the company.

Eg : Suppose the manager of a company is on fixed salary basis, he will not be interested in contacting more and more customers as this would be an extra work load for him. He may not take more orders than the targets given to him . This leads to inefficiencies and loss for the compny whereas no problems for the employee.

Agency Problem can be overcome by designing an INCENTIVE/ PERFORMACE BASED COMPENSATION SYSTEM. Here a variable portion of a manager's saalry is introduced which is directly linked to the sales or profits or the EVA of the company. If all employees are , say, being given 10% of the total profits of the company being distributed to tham as a variable part of their salary, each would feel as a part of the company and try to increase the profits of the comany. The managers' interest and the shareholders' interest become the same i.e. Goal Congruence. If each manager gets a variable portion of his compensation based on his perofrmance, each would be motivated to perform better , which is also in the interest of the company.

jeff jeffy answered 2 years ago

to what extent do you think agency problems and conflicts of interest are problems in the...

to what extent do you think agency problems and conflicts of interest are problems in the investment industry? To what extent do you think the internet boom was fueled by such problems?

How can the money supply affect the interest rate? Explain briefly and show in the graph!

Agency problems within a corporation are _______________. a, conflicts among stockholders with differing objectives b, conflicts...

Agency problems within a corporation are _______________. a, conflicts among stockholders with differing objectives b, conflicts between stockholders and financial intermediaries c, conflicts among managers with competing interests d, conflicts between managers and stockholders

Explain how agency conflicts arise in an organization. Whatare the appropriate solutions to reduce agency...

Explain how agency conflicts arise in an organization. What are the appropriate solutions to reduce agency costs? Cite appropriate examples from Saudi Firms. use your own words and do not copy from other resources.

Explain how agency conflicts arise in an organization. What are the appropriate solutions to reduce agency...

Explain how agency conflicts arise in an organization. What are the appropriate solutions to reduce agency costs? Cite appropriate examples from Saudi Firms.

Explain how Design-Bid-Build and Design-Build project delivery methods can differently affect on management of project changes,...

Explain how Design-Bid-Build and Design-Build project delivery methods can differently affect on management of project changes, claims, and disputes (Max 200 words).

2. Agency conflicts between managers and shareholders Remember, an agency relationship can degenerate into an agency...

2. Agency conflicts between managers and shareholders Remember, an agency relationship can degenerate into an agency conflict when an agent acts in a manner that is not in the best interest of his or her principal. In large corporations, these conflicts most frequently involve the enrichment of the firm’s executives or managers (in the form of money and perquisites or power and prestige) at the expense of the company’s shareholders. This usurping and reallocation of shareholder wealth is most likely...

How can inflation affect the distribution of income? Please briefly explain.

Agency program and policy evaluations are subject to a variety of conflicts of interest, depending on...

Agency program and policy evaluations are subject to a variety of conflicts of interest, depending on "who" performs the evaluation. Discuss the ethical implications of an agency hiring its own outside contractor to evaluate its programs and policies in 200 words.

Define, briefly explain how it works and affect the treasury cash management and give examples of...

Define, briefly explain how it works and affect the treasury cash management and give examples of the following: Cash Concentration Positive Pay Liquidity Management Availability Float Factoring Debt risk Account analysis Earnings credit rate Short-term financing Long-term financing

Question