Performance shares shares of stock given to

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Unformatted text preview: ive plan involves the grant of stock options. stock options An incentive allowing managers to purchase stock at the market price set at the time of the grant. performance plans Plans that tie management compensation to measures such as EPS, growth in EPS, and other ratios of return. Performance shares and/or cash bonuses are used as compensation under these plans. performance shares Shares of stock given to management for meeting stated performance goals. cash bonuses Cash paid to management for achieving certain performance goals. Another market force is the threat of takeover by another firm that believes it can enhance the target firm’s value to restructuring its management, operations, and financing.7 The constant threat of a takeover tends to motivate management to act in the best interests of the firm’s owners. Agency Costs To minimize agency problems and contribute to the maximization of owners’ wealth, stockholders incur agency costs. These are the costs of monitoring management behavior, ensuring against dishonest acts of management, and giving managers the financial incentive to maximize share price. The most popular, powerful, and expensive approach is to structure management compensation to correspond with share price maximization. The objective is to give managers incentives to act in the best interests of the owners. In addition, the resulting compensation packages allow firms to compete for and hire the best managers available. The two key types of compensation plans are incentive plans and performance plans. Incentive plans tend to tie management compensation to share price. The most popular incentive plan is the granting of stock options to management. These options allow managers to purchase stock at the market price set at the time of the grant. If the market price rises, managers will be rewarded by being able to resell the shares at the higher market price. Many firms also offer performance plans, which tie management compensation to measures such as earnings per share (EPS), growth in EPS, and other ratios of return. Performance shares, shares of...
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This document was uploaded on 01/19/2014.

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