CMA Foundation · Fundamentals of Business Economics and Management · Stewardship Theory and Agency Theory of Management
Which measure is most directly aimed at aligning a manager's interests with those of shareholders and so reducing the agency problem?
Granting stock options linked to share price best aligns manager and shareholder interests, because the manager gains when shareholder value rises. Fixed pay, less reporting and manager-chosen auditors do not tie rewards to owners' wealth and weaken control, so they worsen the agency problem.
- APaying the manager a fixed salary with no variable component
- BGranting the manager employee stock options linked to share priceCorrect
- CReducing the frequency of reporting to shareholders
- DAllowing the manager to choose the auditors
Explanation
Stock options make the manager's wealth rise and fall with the share price, which aligns interests with shareholders. A fixed salary gives no link to performance, less reporting increases information asymmetry, and manager-selected auditors weaken independent monitoring.
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