Discuss the advantages and disadvantages of the following forms of managerial compensation in terms of mitigating agency problems, that is, potential conflicts of interest between managers and shareholders.

a. A fi xed salary.

b. Stock in the fi rm that must be held for fi ve years.

c. A salary linked to the fi rm’s profi ts.

15 . We noted that oversight by large institutional investors or creditors is one mechanism to reduce agency problems. Why don’t individual investors in the firm have the same incentive to keep an eye on management? LO.1