It Is Common Practice for Managers to Be Rewarded in a Way

question 30

Multiple Choice

It is common practice for managers to be rewarded in a way that is tied to the profits of the firm,the sales of the firm,or the return on assets.That is,their remuneration is based on the output of the accounting system.Which of the following is a drawback for such bonus schemes?

• A) Bonus schemes tied to the performance of the firm will be put in place to align the interests of the owners and the managers.
• B) Rewarding managers on the basis of accounting profits may induce them to manipulate accounting numbers.
• C) There would be limited incentives for the manager to adopt risky strategies that increase the value of the firm.
• D) The manager may be reluctant to take on optimal levels of debt.

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Definitions:

Point Estimate

A single value (or point) estimate to summarize a likely value for a population parameter based on sample data.

Unknown Parameter

A quantity in a statistical model that needs to be estimated from the data because its value is not known a priori.

P-Value

The probability that the observed data (or a more extreme) would occur if the null hypothesis were true, used to determine the statistical significance of the observed effect.

Type I Error

A statistical error occurring when a true null hypothesis is incorrectly rejected.