Question

Maggie has recently been appointed to a position as a division leader of a manufacturing company. Her salary includes a baseline amount, plus a bonus of 5% of the amount of sales that exceed $500,000 dollars. Discuss at least three potential agency problems this compensation plan could present, and some ways good corporate governance can mitigate those issues.

Answer 1

Motivation is the only way by which the companies can make the employees work correctly and effectively. The motivation can be through two types of incentives: financial and non-financial. Financial incentives are a bonus, profit sharing, discount vouchers, and stock options. It motivates in improving the performance of the subordinates, or the employees. Maggie has joined as a division head. Her employer has offered a compensation plan that includes a bonus after crossing an amount of $500,000. It might motivate the employee to a certain level, but it might also give rise to agency problems. The agency problem occurs when there is a conflict between the interests of the company and its employees. It happens because the employees tend to work in the best interest of the company. There is no benefit to the employees to a certain level. For instance: in the current scenario, the company might have its sales target, and to achieve those targets, the manager has set up such a compensation plan. The first issue is that it is not in the proper interest of the employee. Secondly, the company should adopt the compensation plan that helps develop its employees, but here the company gains all the benefits. Hence, the compensation plan is not sufficient. The third issue is that there are no productive results. Maggie will not be able to work as same because she is not gaining anything. The corporate governance can act in between to provide better results. Corporate governance will help the company to formulate better compensation plans that benefit both parties in the end. It is because the development and growth are the prime factors of a compensation plan of an employee. Corporate governance inculcates principles such as fairness, honesty, integrity, and hard work that will ensure an efficient compensation plan for the employees.