25557 Chapter Notes - Chapter 12: Quiet Life, Restricted Stock, Ideal Solution
Document Summary
Incentive bypass problems - top management cannot bypass middle managers and employees to make investment decisions for several reasons: Top management has to analyse many projects every year and must rely on analysis done at lower levels. Details of a capital investment project are beyond the view of executives and top management cannot afford the time to investigate every alternative. Many investments are not in the capital budget, indulging r&d, worker training, marketing outlays designed to expand a market. Operating managers make small decisions every day such as inventory levels, adding up to large capital outlay. Executives are subject to the same kind of temptations that af ict lower layers of management. Evidence suggests that managers are too risk averse and seek a quiet life when the press to perform is relaxed, with exceptions: Managers must take risks to climb the corporate ladder. Managers compensated with stock options have an incentive to take risk.
