How Managerial Incentives Affect Financial Decisions参考.ppt

If the initial investment is financed by the private equity suppliers. A large or block shareholder is always a good monitor. Debt is a mechanism to discipline or restrict managers While executive compensation is a mechanism to align the interests of managers and shareholders. Shareholders can design a compensation scheme to induce managers to behave at the interest of shareholders. The question is should compensation related to inputs or outputs? A firm may perform poorly just because the whole economy is poor. An important question in this area is that to what extent is executive pay tied to performance. If a CEO’s pay is closely tied to the performance, the CEO is more likely to work hard. TCL case. Yutong. CEO incentives sometimes could also be a very important determinant of corporate mergers and divestitures. 8.5 Executive Compensation The agency problem can be substantially alleviated if the principal can accurately observe the agent’s action, which can be done in one of the following two ways: Measuring inputs: Closely monitor the agent to ensure that he or she works the specified number of hours at the required level of intensity – that is, to measure the agents labor input Measuring outputs: Indirectly measure the agent’s actions by observing the agent’s output Measuring Inputs or Outputs Before the mid-1970s, most large U.S. corporations tried to solve the agency problem by measuring inputs. Although it may be possible to evaluate the quantity of a manager’s effort, it is difficult to evaluate the quality of that effort – in other word, the extent to which the manager’s effort creates value for the firm. Even if the quantity and the quality of a manager’s effort could be evaluated, it would be extremely difficulty to contractually specify a bonus that is tied to such a vague concept. There has been a worldwide trend toward evaluating and compensating managers based on outputs In other words, there is an increased tendency of firms to tie employees pay to