Which of the following mechanisms would be most likely to help motivate managers to act in the best interests of shareholders? a. Take actions that reduce the possibility of a hostile takeover. b. Decrease the use of restrictive covenants in bond agreements. c. Increase the proportion of executive compensation that comes from stock options and reduce the proportion that is paid as cash salaries. d. Elect a board of directors that allows managers greater freedom of action.

Question

09-10-2020
Business

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Which of the following mechanisms would be most likely to help motivate managers to act in the best interests of shareholders? a. Take actions that reduce the possibility of a hostile takeover. b. Decrease the use of restrictive covenants in bond agreements. c. Increase the proportion of executive compensation that comes from stock options and reduce the proportion that is paid as cash salaries. d. Elect a board of directors that allows managers greater freedom of action.

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Answer:

c. Increase the proportion of executive compensation that comes from stock options and reduce the proportion that is paid as cash salaries.

Explanation:

Agency problem arises when the interest of shareholders and managers are at odds.

BY increasing the proportion of compensation from stock options, managers would be more interested taking actions that would increase stock value because if stock value increases, managers income would also increase.