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?

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

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

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.

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.

Consulting firms and human resource departments have spent innumerable hours attempting to develop executive compensation programs that will align the goals of a firm$$s managers with those of the firm$$s shareholders. Which of the following compensation packages is most likely to accomplish this task?

An annual salary of $$500,000$ and a stock option bonus package that provides $100,000$ shares after one year

An annual salary of $$250,000$ and a stock option bonus package that provides $250,000$ shares after five years

An annual salary of $$500,000$ and a stock option bonus package for a total of $250,000$ shares, with $50,000$ shares vesting at the end of each of the next five years

An annual salary of $$800,000$

In addition to well$-$designed executive compensation packages, two other motivational forces can align the interests of managers with those of their shareholders. Which of the following actions could be used to reduce the potential for these agency conflicts and ensure that the firm$$s managers will pursue the long$-$term wealth interests of their shareholders?

Let the manager know that he or she will be fired if the company$$s stock does not reach a certain target by the end of the year.

Let the manager know that a takeover is possible if he or she doesn$$t perform well.