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plan involves the grant of stock
An incentive allowing managers
to purchase stock at the market
price set at the time of the grant.
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
Shares of stock given to management for meeting stated performance goals.
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.
- Fall '13