Agency conflicts between managers and shareholders

Remember, an agency relationship can degenerate into an agency conflict when an agent acts in a manner that is not in the best interest of his or her principal. In large corporations, these conflicts most frequently involve the enrichment of the firm's executives or managers $($in the form of money and perquisites or power and prestige$)$ at the expense of the company's shareholders. This usurping and reallocation of shareholder wealth is most likely to occur when shareholders do not have sufficient information about the decisions and actions being made by the firm's management.

Consider the following scenario and determine whether an agency conflict exists:

Jacob owns Jacob's Tantalizing Tees, a T$-$shirt shop in a small college town in Virginia. With a staff of three part$-$time employees, Jacob operates the business in accordance with his personal goals, dreams, and capabilities.

Does Jacob have an agency conflict to deal with?

Yes; as both the owner and operator of Jacob's Tantalizing Tees, Jacob has created the necessary agency relationship through which an agency conflict can exist.

Yes; there is always an inherent conflict of interest between owners and operators $($managers$).$

No; by having part$-$time, as opposed to full$-$time, employees, Jacob is prevented from experiencing an agency conflict.

No; as both the owner and operator of Jacob's Tantalizing Tees, Jacob has not created the necessary agency relationship through which an agency conflict can exist.

For the past $40$ years, companies have attempted to attract, retain, and encourage managers by developing attractive compensation packages. These