Executive compensation packages often tie performance to bonus and incentive awa
ID: 2740796 • Letter: E
Question
Executive compensation packages often tie performance to bonus and incentive awards, supplemental retirement packages, and severance in order to encourage the magnitude team to align their performance with organizational goals. Which of the following compensation proposals in most likely to be in the best interest of the company's share holders? A base salary of $500,000 plus a stock option package for 250,000 shares that mature in six months. A base salary of $500,000 plus a stock option package for 250,000 shares, with 20% of shares maturing at the end of each of the next five years. A base salary of $500,000 plus perquisites worth $250,000. Vision Tech is a software company based out of New York City. Its stockholders are mostly individual investors and there is relatively little institutional ownership. If several pension and mutual funds were to take large positions in Vision Tech's stock, would direct shareholders invention be more or less likely to motivate the firm's management? More likely Less likely Vision Tech's stock price is currently tracking at $37 per share. The consensus among analysis is that the intrinsic value of Vision Tech's stock is $30 per share. Is Vision Tech more or less likely to receive a hostile takeover bid? More likely Less likelyExplanation / Answer
The Executive compensation proposal which is in the best interest of thecompany's shareholders is
"A base salary of $500,000 plus a stock option package for 250,000 shares, with 20% of shares maturing at the end of each of the next five years" because this proposal ties the executive compensation to the overall company / stock performance for the next five years thus the executive would be motivated to work for the overall benefit of the company as his/her compensation is tied to company performance for the next five years.
Direct shareholder intervention would "more likely" motivate firm's management as institutional investors (pension,mutual funds,etc) can exercise significant influence on the company's operation and fire / terminate management for poor performance thereby motivating firm's management to perform for the overall benefit of the firm.
Due to the intrinsic value $30 of Vision Tech's stock being lower than the current trading price $37, Vision Tech is "less likely" to receive a hostile takeover bid, as the bidder would be paying more then the intrinsic value of Vision Tech stock which would be a poor investment decision.
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