incentive+contracts

Jason Strachman This information was obtained from //Managerial Economics and Business Strategy// by Michael R. Baye pages 223 - 224. Since executives are often paid salary, there is little that motivates performance. Some companies may provide incentive contracts to the executives to boost performance. For example, a company CEO may earn $100,000 base salary, but if the company meets certain performance initiatives like Sales check points or Profit figures then the CEO would earn bonus dollar amounts or stock options. It is important to note performance based rewards benefit stockholders as well as CEOs so reducing the rewards to decrease the pay to the executives may result in declining profits for the firm because the executives may not be as motivated to perform at a high level. In addition to internal incentives, there are forces outisde the firm that will help motivate executives to maximize profits. These are reputation and takovers. Managers want to be noticed. They want to be thought of as a quality employee and an effective leader. Managers will work hard and do well for the company so that they will gain the reputation in the company or in the industry as someone that warrants premium pay. Therefore even if the company does not provide a performance bonus or stock option, a manager will still be motivated to perform at a high level because if he/she does he/she may have the opportunity to change positions or change companies based on past repuation for more money. Another external incentive is the fear of a takeover. If a manager is not performing and the firm consistently is not operating profitfully, investors will attempt to buy the firm and replace the management with new managers who will perform more successfully. To avoid being replaced, managers will work harder than they otherwise would even if they are paid without any perfomance based reward system. __Question 1:__ True or False -- stockholders do not benefit from executive performance based reward systems? __Question 2:__ What are two external forces that act as motivational incentives for executives to maximize profits? A. Reputation and Takeovers B. Stock options and a new office computer C. Stock options and Monetary performance bonuses D. None of the above __Question 3:__ True or False -- managers will have the incentive to maximize profits even without earning performance based bonuses?
 * Answer is False**
 * Answer is A**
 * Answer is True -- external incentives are reputation and takeovers**