CFA Level I · CFA Level I Exam · Organizational Forms, Corporate Issuer Features, and Ownership
A listed company's CEO is paid a fixed salary with no variable pay, and the CEO consistently rejects risky but positive-NPV projects. Which of the following changes to compensation would most likely better align the CEO's interests with those of shareholders?
Granting stock options that vest over several years best aligns the CEO with shareholders. It ties the CEO's wealth to long-term share value, encouraging acceptance of positive-NPV projects. Higher fixed salary or pension benefits do not depend on performance and keep the CEO risk averse.
- AGranting a large fixed pension benefit
- BGranting stock options that vest over several yearsCorrect
- CIncreasing the fixed salary to reflect market rates
Explanation
Long-vesting equity-based pay links the CEO's wealth to long-term share value, encouraging acceptance of positive-NPV projects. A fixed pension or higher salary does not depend on firm performance and, if anything, increases risk aversion.
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