Return to the Situation with the Executive from the Previous

question 12

Multiple Choice

Return to the situation with the executive from the previous question. Now assume that shareholders cannot observe effort,so cannot specify how hard the executive works in the contract but must induce it through the incentive scheme. Which of the following wage contracts would work out best for shareholders in equilibrium?

• A)A flat wage w = 2,500 with no profit share.
• B)A share of 35% of the gross profits.
• C)A share of 55% of the gross profits.
• D)A share of 70% of the gross profits.

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Definitions:

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Interest Rates

The cost of borrowing money or the return on investment for savings, often expressed as a percentage.

Revenue Announcement

Revenue announcement refers to a company publicly disclosing its revenue figures for a specific period, which can impact its stock price and investor perception.