The shareholders of X Ltd. are unhappy about the top manager's performance. While the managers effort in running the firm cannot be observed, it is felt that he or she puts in effort amounting to about 40 hours a week. The manager's annual salary at present is $240,000. A new incentive contract is being considered by the shareholders, whereby the manager would receive a salary of $150,000 per annum plus a bonus of 25% of reported net income before salary and bonus. You are asked to analyze the expected impact of the new bonus plan on the manager. You estimate that if she puts in about 60 hours per week, net income before manager remuneration will be $1,560,000 per annum with probability of 0.7, and $135,000 per year with probability of 0.3. Under the present salary-based remuneration (with the manager working only 40 hours per week), your analysis of past income levels shows that annual net income has been $1,560,000 with probability of only 0.1 and $135,000 with probability of 0.9. You also ascertain that the manager's utility is equal to the square root of the money he or she receives and that disutility for effort is three times the number of hours worked per week.

Q) A new accounting standard is proposed that, while it will not change future expected net income, will greatly increase the volatility (i.e., reduce the precision) of net income. Explain why the manager would likely object to the proposed new standard.