Provide answers to the following five questions using your own words. Be concise

Question

Provide answers to the following five questions using your own words. Be concise and to the point.

Discuss different examples of a conflict of interest between managers and shareholders

Explain how a manager’s risk aversion, effort aversion, and self-interests can affect his/her decision making

Identify and explain main objectives of management compensation

Explain how management compensation can provide an incentive to unethical and/or undesirable behavior. What methods can be used to reduce the chance of unethical activities resulting from compensation plans?

Which financial and non-financial measures would you include in a management compensation contract? Why?

Explanation / Answer

1)Shareholders want dividend to be paid from the net profit but the managers wants the money to be invested in future projects to generate more value to shareholders.Managers may think in other point of view in short therm other than shareholder value maximization

2)As we know that risk and return are directly related to each other, some managers may not want to take risk on some projects which may generate higher rate of return that the shareholders expected return. In reality the project may be challenging but not risky but because of his risk aversion or effort aversion he may not take that project. In some area where manager does not like or no Self interest may not handle it by which overall may affect his decision makin ginturn affect the company.

3)Management compensation is mainly for well being of the shareholders wealth or wealth creation for the company. It should be mix of cash and stock so that they always act by keeping shareholders in mind while decision taking. By this they will be considered as part of company and if they have to earn good money company has to do well inturn it will give positive results for all.

4) To gain instant money they may do something wrong for short term by which the share prices of company may increase and he can exercise his stock options ang get benefitd. To reduce this the stocks given to him can be exercised only after some years he left the company or his rating should be taken from voting of the shareholders, shouldbe compared with industry competitor etc

5) Financial measures include sales growth,profit margin, share price appreciation etc. Non financial measures include image of him in public and social media , rating of him by employees of the company etc.

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