Incentive Compensation

question 37

Essay

Incentive Compensation. Salary and bonus payments tied to short-term performance often constitute a large part of the annual total compensation package earned by top management. Thus, top managers, like the chief executive officer (CEO), typically have huge personal incentives to turn in favorable year-to-year growth in revenues, profits and earnings per share. This can sometimes have the unfortunate effect of focusing managerial attention on near-term accounting performance to the detriment of long-term value maximization.
A. Identify some tools companies use to combat such myopic behavior.
B. Explain the pluses and minuses of stock options versus stock ownership as effective incentive devices.

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Definitions:

Effective

Producing a desired or intended result, often used in contexts relating to efficiency, productivity, or the power to produce a specified effect.

Payee

The individual or entity to whom a payment is directed or owed.

Situation

This is a general term that describes a set of circumstances, context, or condition in which people find themselves or events occur.

Claims in Recoupment

Legal claims made to offset or reduce the asserted losses due to the defendant's breach of a contract.