Question

Which of the following would best alleviate the agency problem in a large corporation?

• A. Compensating employees with stock that can be sold at any time

• B. Keeping owners and managers separate by not allowing employees to own stock

• C. Giving longevity bonuses to all employees

• D. Compensating employees with stock that must be held for a minimum of three years

Answer 1

to eleminate the agency problem we have to make the bridge between the interest of the employee and the interest of the organiasation as whole that means the interest of the organisation's share holder and we can do it by alligning the manager's return with the stock prices of the company but the stocks alloocate arbiterily will not be useful managers or employee may oarticipate in activity that inflate the prices for the short run so we should give them stock that must be held for the minimum of three years.

that means option D. Compensating employees with stock that must be held for a minimum of three years is correct one