Question

Company A pays its managers a fixed salary. Company B ties compensation to the performance of the stock. Which company’s compensation would most help to mitigate conflicts of interest between managers and shareholders?

Answer 1

Answer:

Company B

Explanation:

The reason is that the interest of shareholders is to maximize its investment worth and the manager desires to have better salary which is cost to the shareholders. This means that the shareholder's interest are in conflict with that of management which is also known as agency problems. The alignment of interests of both shareholders and the manager is when the payments made to managers in compensation for their salaries are in shares not in cash form. The manager would now work hard to generate more profits than before, this will increase the value of shares in stock exchange which every shareholder desires. So Company B has mitigated conflicts of interest between managers and shareholders by offering managers shares in compensation for their services offered.