Owesnion 10 Which of the following help convince managers to

Owesnion 10 Which of the following help convince managers to work in the best interes the stockholders? I Cosmpensation bansed on the performance of the stock t Stock option plans Im. Threat of a company takeover IV Threat of creditors a. I and II only b. Ill and IV only

Solution

Compensation based on the performance of the stock and stock option plans will help convince the managers to work in the best interest of the stockholders.

So, the answer is (a) I and II only

The main reason for this is these two features align the interests of managers and stockholders.

The compensation paid to the managers when related to the performance of the stock will motivate the managers to work towards the increasing the stock value. This will in turn increase the value of the stock held by the shareholders of the company in general as well.

Similarly, a stock option provides the manager right to buy the shares of the company on a later date at a predetermined price - the call price. This again therefore motivates the manager to work to increase the share values for the company so that the value of stock options awarded to him also goes up.

Threat of a company takeover and threat of creditors will mainly have its influence over the promoters, owners and large stockholders of the company as their interests would be at stake. It will have a very limited influence over the manager because he would not be the main person to be affected by either of them.