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?

AAdvantages 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.

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