Topic06_Organization - Topic 06 Topic 06 Organization of...

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opic 06 Topic 06 Organization of the Firm OMM 295 CO 95 Ratna K. Shrestha
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verview Overview ± During the economic crisis of 2008 and g 2009,US government bailed out many insurance and auto companies. AIG (America International Group) received more than $173 billion federal funds to prevent bankruptcy. ± Despite the failures of AIG and many other firms, many executives from those firms ceive huge amount of onuses receive a huge amount of bonuses. ± This raises the question if such reward is stified? justified?
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verview Overview z In response, Obama administration imposed restriction on executive compensation in government bailed out companies. z Critics argue that such restrictions will provide no incentives to the managers or workers to ork hard work hard. z So the questions is how can the managers rovide incentives to workers (or owners provide incentives to workers (or owners provide incentives to managers) to put forth maximum effort?
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gent Problem Principal Agent Problem z If the owner is manager as well then their g objective is the same (profit maximization) and there is no problem. z However, if managers are not owners, they maximize their own compensation (not the owners’/firm’s profits) and this can create a problem especially when the owner (principal) annot monitor manager’s (agent) ction cannot monitor manager s (agent) action. z
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This note was uploaded on 05/11/2011 for the course COMM 295 taught by Professor Ratna during the Winter '09 term at The University of British Columbia.

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Topic06_Organization - Topic 06 Topic 06 Organization of...

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