If a firm's board of directors wants to maximize value for its stockholders in general (as opposed to some specific stockholders), it should design an executive compensation system whose focus is on the firm's long-term value.

Question

BlackTom AI · Accepted Answer

The question presents a claim about how a firm's board of directors should design executive compensation with the goal of maximizing value for stockholders in general, rather than for any specific stockholders, and ties this to focusing on the firm's long-term value.
Option 1: False. This statement would be incorrect if one argued that executive compensation should not emphasize long-term value or that it should instead target short-term results or skew benefits toward particular shareholders. However, in governance theory and practice, maximizing stockholders' wealth over the long run is typically achieved by aligning executives’ incentives with sustained firm performance, which is often best accomplished through long-term value focus rather than short-term boosts. Thus, saying it should not focus on long-term value would be at odds with the standard objective of maximizing shareholder value over time.
Option 2: True. This aligns with the principle of corporate governance that boards should design compensation to promote the firm’s long-run value creation, which generally benefits stockholders as a whole. Long-term pay plans, equity-based incentives, and performance metrics tied to durable value creation help align executives’ incentives with enduring firm performance and overall shareholder wealth, reducing incentives to pursue one-time gains or actions that boost near-term metrics at the expense of future prospects. The emphasis on long-term value is a common mechanism to balance risk, incentive alignment, and sustainable performance for the general shareholder base.
Additional nuance: If compensation were skewed toward short-term targets, it could encourage risky behavior or cost-cutting that harms future profitability, potentially harming the broad stockholder base. Therefore, a long-term orientation in compensation design is consistent with maximizing value for stockholders in general, rather than for a narrow subset of stakeholders.

Business Finance Chapter 01 Quiz

If a firm's board of directors wants to maximize value for its stockholders in general (as opposed to some specific stockholders), it should design an executive compensation system whose focus is on the firm's long-term value.

View Explanation

Log in for full answers

Similar Questions

An argument in support of high executive compensation is

An argument that opposes the idea of high executive pay is

Which element of executive pay is most likely to include some metric based on ESG performance?

Which executive remuneration concern is most likely expressed by board members?

Studies show that in most companies, executive pay is significantly aligned with Blank ______.

In addition to salary, what is a major component of a typical CEO compensation package?

In a software company that caters to the federal government it would be most appropriate for which of the following positions to be paid at the highest percentile?

Which of the following is a common reward in variable executive compensation agreements?

More Practical Tools for Students Powered by AI Study Helper

Homework AI Solver

Stylized AI Paper Writer

Plagiarism Checker Assistant

Citation AI Academic Writing Tool

In-Class Translation Assistant

AI Note Generator

AI Quiz Answers

Past Exam Questions from University Test Bank

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler