Question

Shareholders may prefer the compensation package that includes stock options because the options give the CEO the incentive to maximize the price of the company's stock, thus benefiting the shareholders. A fixed salary, regardless of stock price performance, can lead to a CEO who is willing to do the minimum necessary to maintain the job, but who is not motivated to work extra hard for shareholders.
a. True
b. False

Answer 1

Answer: True

Explanation:

There exists a problem known as the Agency Problem between managers and the shareholders of a company. The manager is the agent and the shareholders are the owners. Sometimes, it has been shown that the agent might act in their best interests as opposed to be best interests of the owners of the business.

To solve this, the manager should be made an owner as well and one way to do so is to give them stock options. This way, they will be motivated to work hard for the owners because they will benefit as well.