CEO Bonus Contracts
Why do firms include performance measures in CEO bonus contracts?
A) To give CEOs more autonomy over company strategy
B) To increase CEO salaries regardless of performance
C) To reduce agency problems and align managerial incentives with shareholder interests
D) To allow firms to delay salary payments
C) To reduce agency problems and align managerial incentives with shareholder interests
What is one advantage of using non-financial performance measures in CEO compensation?
A) They provide incremental information about managerial actions affecting long-term value
B) They are easier to verify and standardize than financial measures
C) They are the only reliable measures for CEO performance
D) They ensure short-term profits are maximized
A) They provide incremental information about managerial actions affecting long-term value
Which type of firm is more likely to rely on non-financial performance measures?
A) A prospector firm focused on innovation and new markets
B) A defender firm focused on cost-cutting and efficiency
C) A distressed firm in financial trouble
D) A company with a highly leveraged capital structure
A) A prospector firm focused on innovation and new markets
Why must performance measures be known to CEOs ex ante?
A) To prevent CEOs from making investment decisions
B) To ensure transparency and reduce opportunistic behavior
C) To encourage CEOs to focus on personal interests
D) To increase CEO compensation automatically
B) To ensure transparency and reduce opportunistic behavior
Which of the following is a disadvantage of non-financial measures?
A) They are more precise than financial metrics
B) They provide a direct measure of firm profitability
C) They always predict financial performance accurately
D) They are harder to verify and may be subject to manipulation
D) They are harder to verify and may be subject to manipulation
Why do firms in financial distress rely more on financial performance measures?
A) To encourage long-term investments in innovation
B) To stabilize short-term cash flow and profitability
C) To reduce dependency on financial metrics
D) To allow CEOs to set their own bonuses
B) To stabilize short-term cash flow and profitability
What happens if CEOs are evaluated on unclear or changing performance criteria?
A) They may engage in moral hazard and rent-seeking behavior
B) They become more innovative and risk-taking
C) They automatically receive higher bonuses
D) Their compensation becomes fixed and predictable
A) They may engage in moral hazard and rent-seeking behavior
Why do some companies still rely mostly on financial measures despite their limitations?
A) Regulators require financial measures exclusively
B) Non-financial measures always have high noise
C) CEOs prefer financial measures over non-financial ones
D) Financial measures are externally verifiable and standardized
D) Financial measures are externally verifiable and standardized
What is meant by "performance measure noise"?
A) It refers to the volatility and imprecision of a measure in capturing managerial effort
B) It is the process of CEOs manipulating financial reports
C) It describes the use of non-financial measures in all industries
D) It refers to CEOs ignoring financial performance metrics
A) It refers to the volatility and imprecision of a measure in capturing managerial effort