Corporate Finance
NS e-Prep Course
Nanyang Technological University
Concepts
Concepts in Finance – Answer
Q. What are the relative advantages and disadvantages of using sophisticated management compensation packages to align the interests of managers and
shareholders?
A. Advantages of sophisticated compensation packages
• Allow better alignment among shareholder and management interests
• When a large part of a manager’s wealth is invested in company stock, he/she will work harder to maximize stock price so his/her personal wealth is also
maximized.
B. Disadvantages
• Stock price could increase because the overall stock market is rising, not because the manager has done a good job.
• Compensation packages have raised U.S. executive pay well above that of non-management employees and above that of their counterparts in other
countries.
• Some managers receive high compensation even when the company is performing poorly.