Why do corporate boards of directors sometimes link top managers' compensation to the corporations' stock prices? How might tying compensation too closely to stock prices create an incentive for corporate fraud
What will be an ideal response?
Corporate boards of directors sometimes link top managers' compensation to the corporations' stock price to lessen the principal-agent problem caused by the separation of ownership from control. Linking compensation to stock prices provides managers with an additional incentive to maximize shareholder profits. But tying compensation too closely to stock prices can cause management to maximize short-run profits over long-run profits and to commit corporate fraud to make the firm appear to be more profitable than it is with the intention of increasing the firm's stock price.
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