Think of examples where compensation systems create principal-agent problems (in

Question

Think of examples where compensation systems create principal-agent problems (in other words, decisions and actions would be different, possibly more or less advantageous to the organization and other parties, if the agent's pay was determined another way). Can you think of ways to design systems that would lessen these?

Here is an example: Wall Street executives have long received their pay in the form of stock options, priced well under market value, which can be immediately exercised (the executive either buys the stock cheaply and sells, pocketing the gain, or sells the option). It's been (reasonably) argued that this provided tremendous incentives to paper over problems to keep the firm's stock price above the option strike price. People (including, in his oblique fashion, Alan Greenspan) have maintained that these systems helped contributed to the financial crisis; if the executives were not able to immediately cash out these options (the practice at Goldman Sachs), or if there were effective "claw back" provisions to require the repayment of such compensation if things went wrong in the future, the firms may have been more conservatively run.

Explanation / Answer

the agent is the representative of principal and he should carry actions and works according to principle obligations and priorities. instead of principal benefits, if an agent is working for his own benefits and with his own priorities, it is called as conflict of principle and agent.

in modern business world, each business is handover to the agents and some of they are using its for their self benefit rather than his principal benefits.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.