The action that is likely to be the least effective in aligning shareholder and managers interests is:

Question

BlackTom AI · Accepted Answer

When evaluating which action is least effective at aligning shareholder and manager interests, we must consider how each option incentivizes managers to act in shareholders' best interests.
Option A: 'providing bonuses to managers based on performance targets.' This approach ties manager rewards to measurable outcomes, which generally promotes alignment because higher shareholder value tends to accompany better performance, provided targets are well-structured and not easily inflated.
Option B: 'keeping manager salaries fixed and increasing the award of stock options.' By tying compensation to the company's stock performance through options, managers share in upside and downside, creating a direct link between their actions and shareholder value, which typically enhances alignment.
Option C: 'the automatic annual increase of manager salaries.' This mechanism gives managers a guaranteed pay raise regardless of performance, which weakens the link between effort and compensation, reducing alignment with shareholder interests and potentially encouraging complacency or risk-taking without reward.
Option D: 'the threat of the firm being taken over.' The possibility of a takeovers serves as a governance discipline, since managers know that poor performance could trigger a takeover or proxy contest, motivating them to pursue value-enhancing strategies to avoid lose-lose outcomes for control.
In summary, A, B, and D create or reinforce incentives that connect managerial rewards to firm performance or governance discipline, whereas C provides a automatic, non-performance-based compensation path that undermines alignment with shareholders. Hence, Option C is the least effective option for aligning interests.

The action that is likely to be the least effective in aligning shareholder and managers interests is:

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