1 - D. A branch officer lays off experienced full-time employees and staffs customer service positions with part-time or temporary workers to lower employment costs and raise this year’s branch profit. The manager’s bonus is based on profitability
ANS: The Manager is trying to reduce cost by getting rid of FTEs. Generally the productivity and skill level of a FTE is greater than a part time employee. If FTEs were replaced by part time workers then not only will the work take longer to get done but also the quality of the work will suffer. This could potentially reduce the stock price and increase the losses for the stockholders.
Compensation for the manager should not be based on branch profit as that could be manipulated, for example by using part time employees instead of FTEs. It should instead be based on stock incentive plan (compensation tied to stock price) OR performance shares (stocks given based on goals met) which would tie the manager’s compensation to stock price.
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