Suppose all plant and division managers were paid only a fixed salary—no other incentives or bonuses.
a. Describe the agency problems that would appear in capital investment decisions.
b. How would tying the managers’ compensation to EVA alleviate these problems?
2. Who monitors the top management of public U.S. corporations? (We have mentioned four types of monitoring in this chapter.)
3. We noted that management compensation must in practice rely on results rather than on effort. Why? What problems are introduced by not rewarding effort?
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