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Lecture12 - 13 - agency moral hazard adverse selection

19 other ways to mitigate agency problems

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Unformatted text preview: the market value of equity. 17 CEO Compensation at Microsoft The key objectives of the Company’s executive compensation programs are to attract, motivate, and retain executives who drive Microsoft’s success and industry leadership. The Company achieves these objectives through a pay­for­ performance approach aiming to: Provide executives with competitive cash and stock compensation with a significant portion of total compensation at risk, tied to the creation of shareholder value. Encourage executives to act as owners with an equity stake in the Company. Salary and bonus generally constitutes 15% to 40%, and equity­based compensation constitutes 60% to 85% of total compensation. For example, as of the end of 2005, Steven Ballmer, CEO of Microsoft, has w = $1 million and α = 3.85%. 18 Problems With Incentive Pay A manager should be penalized less if he performs poorly when industry conditions are bad. However, firms do not use relative performance evaluation too much… Changes in stock prices may not be due to the CEO’s actions yet they affect his wealth and make it more risky. Stock pay cannot be used in non­traded firms. Forced to tie compensation to accounting profits A manager with...
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