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 based on 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. Also, Stockholders can talk with managers and make suggestions about how the
business should be run.
1–9
a) The act of contribution done by the company would cause different reaction from the
shareholders. First, the place of contribution is on their headquarters so shareholders
situated in the area may take this as a smart move by the company. However,
shareholders outside the area may not see the advantages of this contribution. The cost of
this contribution needs to be borne by someone and it's most likely by stockholders. This
might lead to decrease of their share price.
b) The move made by SSC, expanding their business in China would lead to the increase of
their share price. If a company is expanding, it would attract investors for it will be
introduced to a bigger market. The fact that they are investing for their business in the
present means that it would generate profit in the future.
c) Common stocks are considered as riskier than Treasury bonds. Shifting their emergency
funds from treasury bonds to common stocks would lead the stockholders to carry the
risk of investing in the company. Common stocks return are not guaranteed, sometimes
they increase other times they decrease. Because of this added risk the share price is most
likely to fall.
1 – 12
In setting up the company's CEO compensation plan one factor to consider is how would
it affect the business activity in the long run. In terms of awarding stock options the board of
directors should plan it in a way that it would be phased over the years as an assurance that the
CEO shall maintain or aim for higher share price and not just on a specific date where he can
exercise the rights. I think the compensation plan should be the mix of fix salary and stock
options so that the CEO would be motivated through the years and treat the company's success as
its own. If I were the vice president of X company I think my decision would be different than if
I were the CEO of other company.