Summary of Chapter 10
Chapter 10 deals with Executive Compensation and the Executive Compensation Theory?
What is Executive Compensation?
Executive Compensation is an agency contract between the firm and its manager that attempts to
align the interests of owners and manager by basing the manager compensation on one or more
measures of the manager's performance in operating the firm.
The chapter speaks about why incentive contracts are necessary and it states that it is necessary
because it forces reputation help to motivate the manager, but incentive contracts are still needed.
Managerial labour markets are not entirely efficient and do not control the moral hazard problem and
also incentives are needed to control manager's shirking. Fama states incentive contract are not
necessary and Forces of reputation help to motivate manager, but incentive contract still needed and
also he states that Suggests managerial labour markets do not work fully well.
RBC bank has a compensation plan and it states that bonus awards depend on the overall RBC
performance and segment performance, relative to targets, adjusted for individual executive targets
and performance related to peer group and this is for short term incentives. For long term incentives it
states that ESO exercise price is based on RBC price around the grant date (expire in 10 years)
Executives must also hold a minimum number of shares. The RBC compensation plan also outlines
how it plans to control compensation risk. It plans to control compensation risk by having the total
compensation adjusted relative to the median of the peer group- making it less subject to variation in
RBC's performance and also states that base salaries are risk free. The chapter also speaks about the
desirable properties of a performance measure. The rate at which the expected value of the measure
responds to manager effort is called sensitivity and the predictability of payoff from measure of
manager effort is called precision. To increase the sensitivity of NI you must reduce recognition lag
Chapter 10 deals with Executive Compensation and the Executive Compensation Theory?
What is Executive Compensation?
Executive Compensation is an agency contract between the firm and its manager that attempts to
align the interests of owners and manager by basing the manager compensation on one or more
measures of the manager's performance in operating the firm.
The chapter speaks about why incentive contracts are necessary and it states that it is necessary
because it forces reputation help to motivate the manager, but incentive contracts are still needed.
Managerial labour markets are not entirely efficient and do not control the moral hazard problem and
also incentives are needed to control manager's shirking. Fama states incentive contract are not
necessary and Forces of reputation help to motivate manager, but incentive contract still needed and
also he states that Suggests managerial labour markets do not work fully well.
RBC bank has a compensation plan and it states that bonus awards depend on the overall RBC
performance and segment performance, relative to targets, adjusted for individual executive targets
and performance related to peer group and this is for short term incentives. For long term incentives it
states that ESO exercise price is based on RBC price around the grant date (expire in 10 years)
Executives must also hold a minimum number of shares. The RBC compensation plan also outlines
how it plans to control compensation risk. It plans to control compensation risk by having the total
compensation adjusted relative to the median of the peer group- making it less subject to variation in
RBC's performance and also states that base salaries are risk free. The chapter also speaks about the
desirable properties of a performance measure. The rate at which the expected value of the measure
responds to manager effort is called sensitivity and the predictability of payoff from measure of
manager effort is called precision. To increase the sensitivity of NI you must reduce recognition lag
