Incentives, Investment decisions & Firm Performance

Incentives, Investment decisions & Firm Performance

Incentive systems in firms shape the behaviour of employees from the lowest layer of
the organization to the top manager. This largely determines the firm’s productivity
and survival. As the firm’s incentive system changes, so does the firm’s performance
and profit.

Investment decisions are among key decisions that the chief executive officer (CEO)
takes. Right investment decisions expand the growth potential of the firm and increase
its market value. Investment decisions are though risky and frequently fail, which can
impact the firm’s market value negatively. The CEO’s compensation pay is likely to
affect investment decisions.

Your task in the coursework is to:
1) study the principal-agent theory to define the issue of incentive system
design in the firm;
2) explain a general solution to the principal-agent theory and the
requirements that an optimal incentive system should possibly meet;
3) carefully distinguish between the level and structure of the CEO’s
compensation pay. Explain whether and how common compensation pay
structures may affect CEO’s investment behaviour; and
4) put forward an incentive mechanism (pay contract) that encourages the
CEO to take necessary risky investment decisions but discourages her to
take “imprudent” risk. Attempt to justify your proposal by referring to the
literature.

A number of notes will be placed on the course webpage to guide you through your
research and help you with understanding the literature on CEO’s pay and investment
behaviour. A note will specify marking guidelines in details. You should carefully
follow the guidelines.

 

Is this the question you were looking for? If so, place your order here to get started!