Discuss the importance of compensation policies in diversified firms and identify the CEO compensation package that most closely aligns the interests of the CEO with those of stockholders

What will be an ideal response?

A firm's compensation policies constitute a final set of tools for implementing corporation diversification. To the extent that compensation in diversified firms gives managers incentives to make decisions consistent with stockholder's interests, they can be an important part of the process of implementing corporate diversification. Traditionally, the compensation of corporate managers in a diversified firm has been only loosely connected to the firm's economic performance. Research indicates that differences in CEO cash compensation (salary plus cash bonus) are not very responsive to differences in firm performance but if a substantial percentage of a CEO's compensation came in the form of stock and stock options in the firm, changes in compensation would be closely linked with changes in the firm performance. These and similar findings reported elsewhere have led more and more diversified firms to include stock and stock options as part of the compensation package for the CEO to more closely align the interests of the CEO with those of stockholders.