Eco 550 Check Your Understanding Chapters 1 and 2

In: Business and Management

Submitted By clgilchrist
Words 993
Pages 4
Chapter 1: Exercises 2, 3, and 6
2. Explain several dimensions of the shareholder-principal conflict with manager-agents known as the principal-agent problem. To mitigate agency problems between senior executives and shareholders, should the compensation committee of the board devote more to executive salary and bonus (cash compensation) or more to long-term incentives? Why? What role does each type of pay play in motivating managers? The dimensions of the principal agent problem are:
Principals lack of knowledge, skill, and time than agent.
The objective for principal and agent is difficult to align. Normally agent is looking for present value; principal is looking for long term return.
Compensations committee should design a salary or bonus formula that can satisfy agent’s expectation. For example, if any investment decreases the present value but increase the long term value that should be considered to manager’s contribution and be reward in a monetary way. Therefore, manager would not radically to seek present value. The salary plays a role of manager’s daily work. The bonus plays a role of manager’s operation performance. Bonus should motivate manager’s decision for long term and short term consideration.

3. Corporate profitability declined by 20 percent from 2008 to 2009. What performance percentage would you use to trigger executive bonuses for that year? Why? What issues would arise with hiring and retaining the best managers?
If the corporate profitability declined by 20% in 2008 to 2009, we need to look into not only the performance of company, 2008 is the start of global financial crises. The business environment is declining therefore should consider that fact. HR should perform a performance appraisal to executives to identify what is the reason of business declined. When hiring and retaining the managers those identified area should…...

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