The Board of Directors of CamCell, Inc

question 110

Multiple Choice

The Board of Directors of CamCell, Inc., wishes to design a CEO compensation plan that will align the personal interests of the CEO with the interests of the shareholders in long-term firm performance. The Board wishes the CEO to take more short-term risks in order to achieve potentially higher long-term returns. Consequently, the Board has decided on an incentive plan that involves payout based on the firm's performance five years in the future. CamCell is presently searching for a new CEO. Which of the following statements is true?

• A) This plan will be very attractive in luring candidates for the CEO position.
• B) CamCell may have to over-compensate its CEO in order to offset the personal risk a CEO would undertake under this plan.
• C) Institutional investors disapprove of long-term executive incentive plans and they may sell their blocks of stock in CamCell.
• D) This type of plan is likely to cause the CEO to underinvest in R&D in order to boost CamCell's long-term profitability.

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Definitions:

Kinetic Energy

The energy possessed by an object due to its motion, which is defined by mass and velocity.

Chemical Energy

Energy associated with the interaction of atoms in a molecule.

Mechanical Energy

A type of kinetic energy associated with the position, or motion (such as walking or running), of an object.

Entropy

A measure of disorder or randomness in a system, often associated with the second law of thermodynamics regarding energy dispersal.