Which of the following forms of compensation would most likely align management’s behavior with the interests of the shareholders?
a. A fixed salary.
b. A salary plus a bonus based on current period net income.
c. A salary plus stock options that cannot be exercised for 10 years.
d. A salary plus stock.
Answer:C
Answer (c) is correct The requirement is to identify the form of compensation that would most likely align management’s
behavior with the interests of the shareholders.
Answer (c) is correct because stock options that cannot be exercised for 10 years provide an incentive to manage the firm to maximize long-term stock value.
Answer (a) is incorrect because a fixed salary does not provide an incentive to maximize shareholder value.
Answers (b) and (d) are incorrect because they provide an incentive to maximize short-term profit of the firm. This may not be consistent with long-term profitability.