Hope this can help! <3

1. Executive Incentives
Cortez, Angela
Obero, Queenie
Padua,Allein
Pepillo, Jonalyn
Romero, Luiza
Cahila, Kim

2. Potential Managerial Temptations
•A manager has a variety
of stakeholders that are
affected by her actions.

3. Example Of self-serving managerial
actions include:
• Shirking
• Hiring friends
• Consuming excessive perks
• Building empires
• Taking no risks or chances to avoid being fired
• Having a short-run horizon if near retirement

4. Types of Executive Compensation
1. Base Salary and Bonus
-Determined through the benchmarking
method
*BENCHMARKING METHOD*
- This method is where the compensation
committee of the board of directors surveys peer CEO
salaries for comparison.

5. Types of Executive Compensation
2. Stock Options
- Most common form of market-
oriented incentive pay.
- are contracts that allow executives
to buy shares of stock at a fixed price called
“strike price”

6. *Stock Grants*
- Alternative forms of long-term incentive
compensation
Two Types of Stock Grants:
1. Restricted Stock
- Includes a limitation that requires a
certain length of time to pass or a certain goal to be
achieved before the stock can be sold.
2. Performance Shares
- Refer to a company’s stock given to
executives only if certain performance criteria are met.
Types of Executive Compensation

7. Does incentive-based compensation work in general?
There are two ways to examine whether or
not incentive-based compensation works
-First, one could try to see if there is a positive
relation between firm performance and management
compensation. - defined as ex post evidence - Have managers
been properly rewarded for increasing the firms' value? If the
answer is 'yes', then we could surmise that incentive
compensation works.

8. Does incentive-based compensation work in general?
-Another way to assess the efficacy of incentive-
based compensation is to see if those firms that enacted these
mechanisms subsequently experienced superior performance. -
defined as ex ante evidence. - Once managers are given
incentives, then did the firms subsequently perform well?
Intuitively we might expect the answer to be 'yes' but surprisingly
the evidence is mixed.

9. Potential “incentive” problems with incentive-based
compensation
• Problems with accounting-based incentives
-the used of accounting profits to measure performance has
several potential drawbacks.
1. to boost accounting profits, CEO has an incentive to forego
costly research and development that might make the firm more
profitable in the future than in the present.
2. accounting profits may be manipulated.
3.the bonus plan is developed a new each year and, if the
threshold cannot be met one year, the CEO has an incentive to move
earnings from present year to the future.

10. Problem with Stock Options Incentives
1. Shareholder returns combine both stock price appreciation
and dividends. The stock is only affected by price
appreciation.
2. The stock price is more likely to increase when the CEO
accepts risky projects.
3. stock option lose some incentive for the CEO if the stock
price falls too far below the strike price.
4. CEOs may try to manipulate earnings and thus maximize
profits in one target year to make the stock price more
favorable for exercising options.

11. Another Problem with Executive Stock Options
• Stock Options Problems
-Stock options are tied to the firms stock price,
which help align incentives but executives only have partial
influence on stock prices.
- Stock prices are affected by:
* company performance
* economy

12. Another Problem with Executive Stock Options
• Options lose their effectiveness when stock price falls too far
below the strike price.
To re-establish motivation for the executives:
- reprice previously issued options
- risky company projects