Specific Electric Co asks you to implement a pay for performance incentive contract for its new CEO.

Specific Electric Co asks you to implement a pay for performance incentive contract for its new CEO. The CEO can either work hard with a personal opportunity cost of $200,000 or reduce her effort, thereby avoiding the personal cost. The CEO faces three possible outcomes: the probability of her company experiencing good luck is 30 percent, medium luck, 40 percent and bad luck, 30 percent. Although the management team can distinguish the three “states” of luck as the quarter unfolds, the Compensation Subcommittee of the Board of Directors (and the shareholders) cannot do so. Sometime thereafter, the CEO decides to expend high or low work effort, and one of the following observable shareholder values then results: Shareholder Value (in millions)Good Luck (30%)Medium Luck (40%)Bad Luck (30%)High CEO Effort$1,000$800$500Low CEO Effort$800$500$300Assume the company has 10 million shares outstanding offered at a $65 initial share price, implying a $650 million initial shareholder value. Because the CEO’s effort and the company’s luck are unobservable to the owners and company directors, it is not possible when the company’s share price falls to $50 and the company’s value to $500 million to distinguish whether the company experienced low CEO effort and medium luck or high CEO effort and bad luck. Similarly, it is not possible to distinguish low CEO effort and good luck from high CEO effort and medium luck.Answer the following questions from the perspective of a member of the Compensation Committee of the Board of Directors who is aligned with the shareholders’ interests and is deciding on bonus plans for the CEO.1-Suppose you decide to elicit high CEO effort when and if good luck occurs by paying a bonus only for an increase in the company’s value to $1 billion. What criticism of this incentive contract plan can you see?

Show more







Calculate Your Essay Price
(550 words)

Approximate price: $22

Calculate the price of your order

550 words
We'll send you the first draft for approval by September 11, 2018 at 10:52 AM
Total price:
$26
The price is based on these factors:
Academic level
Number of pages
Urgency
Basic features
  • Free title page and bibliography
  • Unlimited revisions
  • Plagiarism-free guarantee
  • Money-back guarantee
  • 24/7 support
On-demand options
  • Writer’s samples
  • Part-by-part delivery
  • Overnight delivery
  • Copies of used sources
  • Expert Proofreading
Paper format
  • 275 words per page
  • 12 pt Arial/Times New Roman
  • Double line spacing
  • Any citation style (APA, MLA, Chicago/Turabian, Harvard)

Our guarantees

Delivering a high-quality product at a reasonable price is not enough anymore.
That’s why we have developed 5 beneficial guarantees that will make your experience with our service enjoyable, easy, and safe.

Money-back guarantee

You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.

Read more

Zero-plagiarism guarantee

Each paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.

Read more

Free-revision policy

Thanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.

Read more

Privacy policy

Your email is safe, as we store it according to international data protection rules. Your bank details are secure, as we use only reliable payment systems.

Read more

Fair-cooperation guarantee

By sending us your money, you buy the service we provide. Check out our terms and conditions if you prefer business talks to be laid out in official language.

Read more

Order your essay today and save 10% with the coupon code: best10