Incentives

1.) The issue of incentives in paying managers can be a very compelling argument. There are a couple of tradeoff involved in paying managers based on company stock performance rather than economic profit (residual income). First by paying managers by stock performance it will push a manager to do what is best for the company to raise profit and increase the better output for the company. Knowing the manager will benefit greatly from a positive company stock performance he will not do what may be best for him or his team but overall for the company, after all the main goal of every company is make profit. If the manager was paid strictly on income than he has a reason to slack for he will be getting the same pay check no matter how the company does although in reality he could get fired or the company could go under. Although a negative tradeoff for paying based on stock performance is a possible manager over doing his job and micro managing. The principal has to choose whether or not to trust his agents and there is now a fight between trust and control. There has to be a balancing act between trust and control with a stock performance. For low wages control is better, but for high wages trust is the way to lean. Many of the admired companies provide room for initiative, but also push for high expectations and rewards. As stated in the WSJ article fewer companies are tying their incentive-pay programs directly to their stock price. PepsiCo Inc. is one company who had changed to performance benchmarks that employees can actually influence. The other large issue between the two is decentralization of a company. Stock performance pay usually leads to a more centralized company where economic-profit based usually benefits one division and return decentralizes a company.

2.)

a.) An increase in “mixed economy activity” can lead to a shift in compensation from stock-based towards economic-profit-based for a few reasons. First, if the economy in whole is...