ECN 204 Lecture Notes - Lecture 4: Downside Risk, Net Income, Earnings Management
Document Summary
Real incentive plans follow from agency theory (multiple periods) Executive compensation plan: agency contract between firm and its manager that attempts to align interest of owners and manager by basing the manager"s compensation on one or more measures of the manager"s performance in operating the firm. Compensation plans based on net income and share price. Cash bonus, shares, options, and other components of executive pay that are awarded in yr depending on ni and share price performance. Holmstrom (1979) and feltham and xie (1994) in section 9. 6. 1 say multiple performance measures increase contracting efficiency. Net income informs investors but it has important role in motivating manager performance (improve managerial labour markets) Enable good investment decision and securities market operation. Ni needs to be sensitive and precise or else it won"t be informative to accountants. Incentive contracts aren"t necessary because managerial labour market controls moral hazard. Forces of reputation on managerial labour market enough to motivate manager to work hard.
