Agency theory suggests that a way to motivate managers to act in the best interests of the owner/shareholders is to link managerial compensation to performance measures such as net income or share price. However, such a linkage imposes a risk on the manager. Required:

a) Why is it important to control the risk thus imposed on managers? Explain

b) Explain two methods by which risk imposed on the managers could be reduced. What happens if too much compensation risk is eliminated?