Residual income can avoid the problems of goal incongruence.Any project that earns more than the hurdle rate will have a positive residual income,which avoids the problems of goal incongruence.

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Residual income is the excess income earned by a project after the cost of capital has been accounted for. If a project earns more than the hurdle rate (the minimum rate of return required by investors), it will have a positive residual income. This aligns the goals of managers with those of investors because both parties want the project to earn a return that is greater than the cost of capital. Therefore, residual income can help avoid the problem of goal incongruence, which occurs when the goals of managers and investors are not aligned.

Residual Income Can Avoid the Problems of Goal Incongruence