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Case Exercise Designing a Managerial Incentive Contract page 628 Textbook: MANAGERIAL ECONOMICS:

Case Exercise �Designing a Managerial Incentive Contract� page 628
Textbook: MANAGERIAL ECONOMICS: APPLIACTIONS, STRATEGY AND TACTICS - 11th edition


What is the maximum amount it would be worth to shareholders to elicit high CEO effort all the time rather than low CEO effort all the time?

If you decide to pay 1% of this amount (in Question 1) as a cash bonus, what performance level (what share price or shareholder value) in the table should trigger the bonus? Suppose you decide to elicit high CEO effort when and if medium luck occurs by paying the bonus for $800 million outcomes. What criticism can you see with this incentive contract plan?

Suppose you decide to elicit high CEO effort when and if good luck occurs by paying the bonus for $1 billion outcomes only. What criticism can you see with this incentive contract plan?

Suppose you decide to elicit high CEO effort when and if bad luck occurs by paying the bonus for $500 million outcomes. What criticism can you see with this incentive contract plan?

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