COMMERCE 4AF3 Lecture Notes - Lecture 10: Efficient-Market Hypothesis, Employee Stock Option, Executive Compensation
14 Dec 2017
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Document Summary
Agency contract between firm and its manager that attempts to align interest of the owners and manager by basing manager"s compensation on one or more performance measure in operating the firm. Aim is to reduce agency costs that results from moral hazard. Agency contract -> motivating manager to work in the best interest of the company. There is an assumption is that labour market is efficient and self-sustaining. Internal monitoring - lower level managers will tattle if they are caught shirking. Nature of competition - internal monitoring - cut throat nature of corporate america (upward pressure for low level manager to move to middle to upper) Low level will tattle on the middle level if they were caught shirking, middle will get fired and low can move up. Argues that labour market are not efficient so efficient contracts are needed. Hit on reputation is not enough to offset moral hazard. Compensation plan (rbc executive plan) -page 407 - 408.
