Name: Pamela D.

Morte
Course & Year: BSMA – 3
Assignment # 1
Answers:
1–8
One conflict between managers and stockholders is that managers’ personal goals might
compete with that of the stockholders’ wealth maximization, wherein managers might be more
interested in maximizing their own wealth than their stockholder’s wealth in such a way that they
will pay themselves excessive salaries. These conflicts can be alleviated by effective executive
compensation plans that would motivate managers to act in their stockholder’s interest.
Compensation packages should be structured so that managers are rewarded on the basis of the
stock’s performance over the long run, not the stock’s price on an option exercise date. This
means that options should be phased in over several years so managers will have an incentive to
keep the stock price high over time. Since intrinsic value is not observable, compensation must
be based on the stock’s market price—but the price used should be an average over time rather
than on a specific date. Stockholders nowadays have the influence over firm’s operation. They
can talk with the managers about how the business should operate. Also, Stockholders can talk
with managers and make suggestions about how the business should be run.

1–9

a.)