The owners of a small manufacturing concern have hired a vice president to run the company with the expectation that she will buy the company after five years. In this initial contract, compensation of the new vice president is a flat salary plus 75% of the first $150,000 profit. Beyond the first $150,000 of profit, the vice president's compensation is the salary she receives at $150,000 profit plus 10% of company profits in excess of $150,000. The initial contract also stipulates that, after five years, the purchase price of the company will be 4.5 times earnings (profit), computed as average annual profitability over the next five years. Assume the company will be worth $10 million in five years. The goal of the owners of the firm is to maximize profits.

A contract that fixes the purchase price of the firm at 5 times earnings would make the incentives of the vice president less or morealigned with the goals of the firm, compared with the original contract.