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Relative to the Agency Problem, how do compensation and bonus policies impact risk management?
Given the recent controversies regarding executive compensation, should stock options and bonuses be eliminated?

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Relative to the Agency Problem, how do compensation and bonus policies impact risk management?
Given the recent controversies regarding executive compensation, should stock options and bonuses be eliminated?

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Let's analyze and discuss the first question.

1. Relative to the Agency Problem, how do compensation and bonus policies impact risk management?

-- The entire issue surrounding the agency problem in relation to bonuses and risk management began within the past decade, when some of the largest corporations in America began awarding executives bonuses based on certain factors, including performance, production, and efficiency. What this created was a situation where executives began doing all that they could in order to secure that bonus or that level of compensation. This gave rise to a great deal of fraudulent activity from those same executives, who were then manipulating accounting transactions in order to meet certain criteria that guaranteed their bonus. For example, certain companies believed that if management was able to keep production and sales high enough and expenses low enough to achieve a net income as opposed to sustaining a net loss, that they deserved bonuses. This gave management ...

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