Part B Company X has recently appointed a new Chief Executive Officer (CEO). Apart from her base salary, she is also entitled to a bonus based on company profits.

Required

i. Using Agency Theory, explain why the CEO is paid a base salary.

ii. The CEO may try to maximize her bonus at the expense of the companys long-term future. Suggest how shareholders can discourage such behavior.

iii. Briefly outline how the CEOs behavior will be constrained by the market for managers