Executive compensation packages often tie performance to bonus and incentive awards, supplemental retirement packages, perquisites, and severance pay, in order to encourage the management team to align their performance with organizational goals. Executives are often compensated above and beyond their salary and benefits.
1. Which of the following perquisites would not encourage managers to maximize long-run shareholder wealth?
A. A percentage of the company's profits
B. Stock options
C. The use of a private jet
2. Vision Tech is a software company based out of San Francisco. Its stockholders are mostly institutional investors and there is relatively little individual ownership. If these institutions dilute them positions and sell off their stake in vision Tech's stock to several individual investors, would direct shareholder intervention be more or less likely to motivate the firm's management?
A. More likely
B. Less likely
3. Vision Tech's stock price is currently trading at $37 per share. The consensus among analysts is that the intrinsic Tech's value of vision Tech's stock is $30 per share. Is vision Tech more or less likely to receive a hostile takeover bid?
A. More likely
B. Less likely

Employee Stock Options (ESOs) are equity compensation which gives the employee the right (but not an obligation) to purchase the company's stock at a given price within a given time frame.

The employee can hold on to the stock options until some future date and then make a tidy profit.

The problem however is, it is doubtful that any employee or group of employees can directly affect the value of the company's stock. Stock values are dependent on a host of many other factors.

Hence, this option will be attractive to managers but does not necessarily motivate them to maximize shareholder

Use of a Private Jet: This does not motivate any employee in the long-run any more than using the company's highly advanced computer as a work tool will motivate an employee.

Percentage of the company's profit: This option, unlike the others, has a direct link between the employees' productivity, his take home, and the company's performance/profit is the best way to stimulate employees towards maximizing shareholder wealth in the long-run.

An employee will be motivated to perform more, take more ownership and accept a greater degree of accountability if he or she knows that the result of their actions will be beneficial not just to the company but to them as well.

2. It is less likely that Individual shareholders/investors will motivate the firm's management. This is based on the premise that Institutional Investors (which are simply companies investing in other companies on behalf of clients or members) are more likely to bring to the table much more resources, ideas, relationships that help protect and enhance their interest in companies where they have interests than individual investors.

In other words, the chances that a company with institutional investors will perform better is higher than the company with individual investors. This thinking is why it is less likely that divestment to individual investors by institutional investors will motivate the firm's management.

3. It is less likely that a company that is outperforming its intrinsic value in the market will become subject to a hostile take over.

Why? Hostile takeovers are usually motivated by the desire to take over a weak or failing company. In this regard, a weak company is one that is significantly undervalued. Other reasons why a company may be taken over in a hostile fashion include:

desire to leverage a company's brand, technology, operation, etc
unhappy investors who want to see a change in the performance of the company so that their interests are protected and enhanced. Such activist investors usually look to shake up the company's operations accordingly.

Cheers!