Question

In addition to well-designed executive compensation packages, two other motivational forces can align the interests of managers with those of their shareholders. Which of the following actions could be used to reduce the potential for these agency conflicts and ensure that the firm’s managers will pursue the long-term wealth interests of their shareholders? Let the manager know that he or she will be fired if the company’s stock does not reach a certain target by the end of the year. Let the manager know that a takeover is possible if he or she doesn’t perform well.

Answer 1

Answer:  Let the manager know that a takeover is possible if he or she doesn’t perform well.

Explanation:

Agency problems refer to when managers take actions that benefit them instead of the shareholders of the company.

There are quite some ways to reduce the incidence of this happening and one of those is to let the manager know that a takeover is possible if they do not perform well.

Managers do not particularly like takeovers because the new owners of the company tend to get rid of the company's management who will be viewed as the reason for the company's failure or lack of growth. This will also impart on their reputations as good managers.