Agency theory suggests that a way to motivate managers to act in the best interests of the owners/shareholders is to link managerial compensation to performance measures such as net income or share prices. However, such linkage imposes some risk on the managers. Required: (a) What are the agency risks that are referred to in the above statement? (b) How can the compensation risk imposed on corporate managers be controlled or reduced? (c) Inclusion of shares and options in managerial compensation packages are designed to provide managers an incentive to adopt the policies that benefit the firm in the long-term. If this is true, what is the justification for having cash or bonus element in the compensation package?