Question 1.RQ.4: Some businesses try to overcome the agency problem referred ...
Some businesses try to overcome the agency problem referred to in the chapter by using an incentive scheme that is based on the growth of profits over a period. What are the drawbacks of this type of scheme?
Various problems are associated with such an incentive plan. These include:
\bullet It is a ‘one-way bet’. There are no penalties if the managers fail to deliver.
\bullet It fails to take risk into account. One way of increasing profits is to increase the investment risks.
\bullet The profits generated may not be entirely due to the actions of managers. Other factors (for example, general economic conditions) may have an important influence.
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