BUS 421 Lecture Notes - Lecture 10: Executive Compensation, Inverse Relation, Surtax

• School: Simon Fraser University
• Department: Business Administration
• Course: BUS 421
• Professor: Karel Hrazdil

Document Summary

Holmstrom (1979) and feltham & xie (1994) suggest multiple performance measures increase contracting efficiency. Are incentive contracts necessary: while internal and market force may help control managers" tendencies to shirk, they do not eliminate them, effort incentives based on some measure of the payoff (ni, share price) are desirable for efficient contracting. Dimensions of financial statement usefulness: another tradeoff between investor-informing and manager performance- motivating dimensions, to properly align the interests of managers and shareholders an efficient contract needs to achieve both: high level of motivation, controlled compensation risk. Albuquerque (2009) argued that firm"s industry is good place to start, but firm size must also be taken into account. If industry"s product falls, relatively small firms may suffer more from fixed costs than compared to. Concern: with implementing too many controls that limit upside risk, managers have little incentive to invest in risky projects. Solution: increase share-based compensation, such as esos (which increases upside risk)