Skip to content

CMA Intermediate · Financial Management and Business Data Analytics · Introduction to Financial Management

Which mechanism is primarily intended to reduce the agency problem by making managers' pay depend on the firm's long-term share price performance?

An employee stock option plan with a vesting period reduces the agency problem because managers gain only if the share price rises over the long term, aligning their interests with shareholders. Fixed pay, idle cash and weaker boards do not create this alignment.

  1. AEmployee stock option plan with a vesting periodCorrect
  2. BFixed monthly salary with no variable component
  3. CIncrease in the firm's cash holdings
  4. DReduction in the number of independent directors

Explanation

Stock options with vesting tie managers' wealth to long-run share price, aligning their interests with shareholders. Fixed salary gives no link. Higher cash holdings can worsen free cash flow problems, and fewer independent directors weakens monitoring.

Did you get it right without looking?

One question tells you little. A timed set on Introduction to Financial Management shows your real accuracy, how long you take and where you lose marks.

Practise Introduction to Financial ManagementFree diagnostic mock

More Introduction to Financial Management questions