Questions 1. What is the maximum amount it would be worth to shareholders to elicit high effort all of the time rather than reduced effort all of the time? Answer + $240 million 2. If you decide to pay 1 percent of the increase in shareholder value as a cash bonus, what performance level (what share price or shareholder value) in the table should trigger the bonus? Suppose you decide to elicit high effort by paying a bonus should the company's value rise to $800,000,000. What two criticisms can you see of this incentive contract plan? 3. Suppose you decide to elicit high effort by paying a bonus only for an increase in the company's value to $1,000,000,000. When, and if. good luck occurs, what two criticisms can you see of this incentive contract plan? 4. Suppose you decide to elicit high effort by paying the bonus when the company's value falls to $500,000,000. When and if, bad luck occurs, what two criticisms can you see of this incentive contract plan? 5. If the bonus compensation scheme must be announced in advance, and if you must pick one of the three choices in Questions 2, 3 and 4, which one would you pick and why? In other words, under incomplete information, what is the optimal decision by the Board's Compensation Committee dedicated to act in the shareholders' interest? Questions 1. What is the maximum amount it would be worth to shareholders to elicit high effort all of the time rather than reduced effort all of the time? Answer + $240 million 2. If you decide to pay 1 percent of the increase in shareholder value as a cash bonus, what performance level (what share price or shareholder value) in the table should trigger the bonus? Suppose you decide to elicit high effort by paying a bonus should the company's value rise to $800,000,000. What two criticisms can you see of this incentive contract plan? 3. Suppose you decide to elicit high effort by paying a bonus only for an increase in the company's value to $1,000,000,000. When, and if. good luck occurs, what two criticisms can you see of this incentive contract plan? 4. Suppose you decide to elicit high effort by paying the bonus when the company's value falls to $500,000,000. When and if, bad luck occurs, what two criticisms can you see of this incentive contract plan? 5. If the bonus compensation scheme must be announced in advance, and if you must pick one of the three choices in Questions 2, 3 and 4, which one would you pick and why? In other words, under incomplete information, what is the optimal decision by the Board's Compensation Committee dedicated to act in the shareholders' interest
