Statistics Analysis

Statistics Analysis

Chapter 1

2. Dimensions of the Shareholder-Principal Conflict

Principal Agent concept refers to the relationship that exits when one individual works in the interest of another individual. In order words, it is an arrangement where on party has been legally appointed by another party to perform or act on their behalf. Furthermore, in this relationship, the agent who is the manager acts on the behalf of owner principal. People that are involved in the company, either in terms of money or time, they are frequently concern on the business performance. As the nature of two people differs, regardless of few similarities, differences arise and hence turn out to be a problem for company. These differences take place due to difference in ownership and responsibility and due to asymmetric information (McGuigan, 2011).

The dimensions of Principal-Agent Problems are as followed:

The deficiencies of the principal with respect of skills, time management and knowledge compared to agent

The Alignment of Objective from agent and principal perspective is different. Principal is always looking for long term benefit while agent has been valuing on the present value of the investment (McGuiga, Moyer, Harris, 2010).

Considering the above dimensions, compensation committee must formulate salaries or bonuses formula in such a way that it satisfy and keen the expectation of the agent. Such as, when investment reduces the present value but at the same time, due to this reduction long term value increases, than at this point principal should appreciate managers and should reward them in monetary terms. Hence, due to this, managers will not be fundamentally being seeking present value. Beside this, salaries have been playing an important role in daily work of managers. As far as bonuses are concern, this plays an important role in operation performance of the manager. Bonuses motive decision of the managers for long term as well gives consideration for short term as well.

What challenges principal is to generate environment, an environment that motive agents (incentives) and they can easily align their objectives. The principal agent conflict arise when incentive system hinders to the employee i.e. overwork and lower incentive. The gap that exists between the agent and principal is due to lack of information and this result in conflict (Moles, Parrino, Kidwell, 2011).

3. Decline in Corporate Profitability

A corporate profitability refers to the financial performance measure that shows earnings of the company after subtracting all expenses. When this measure decline, this means that company revenues has been declining or expenses has been increased for particular year. When corporate profitability declined by 20% in 2008 to 2009, management does not only require viewing the overall performance of the company but also require viewing external factors. During 2008, world was facing financial crisis and it was obvious that each company profitability will decline (Brigham, Ehrhardt, 2011).

Considering this factor, Corporate should set off executive bonuses in such a way that it compensate financial crisis and decline scenario as well bonuses. Human Resources Management should perform an appraisal in order to identify area and ...