Question

Discuss the different ways of providing incentives to managers that might get them to act more in the way shareholders want them to

Answer 1

There are mainly four ways of providing incentives to managers for acting in best interests of stockholders':

-- Managerial compensation: The compensation of management s aligned with the interests of the stockholders. It is usually done

i) Performance shares: The managers receive an annual salary along with the company shares and performance bonuses. The managers receives a specified number shares based on the performance of the company.

ii) Executive stock options: Also with the usage of stock options, management are aligned closer to the stockholders interest as they themselves will be shareholder

-- Direct intervention by stockholders: The huge institutional stockholders such as mutual funds and pensions often exert pressure on mangers and, as a result, the operations are aligned with the stockholders interest

-- Threat of firing: When stockholders are not happy with performance of managers, they may encourage the existing board of directors for changing them, or may re-elect a new board of directors for the task accomplishment

-- Threat of takeovers: When the stock price declines because of the inability of management to run the firm effectively, stockholders or competitors may take a controlling interest in the firm and bring in their own management