Given a series of employment contracts with the same slope (where slope refers to how the contract varies with changes in the firm's gross profits)but different intercepts (referring to the overall generosity of the contract).Which of these is not a consideration in figuring out which of these intercepts the shareholders would decide to build into the contract offered to the manager?
A) if too generous a contract is offered, this comes out of the firm's bottom-line profit.
B) if too generous a contract is offered, the manager may become lazy and not exert the required effort.
C) if the contract isn't generous enough, the manager will decide to work elsewhere.
D) if the contract isn't generous enough, only low-ability managers will apply.

Question

Quizplus · Accepted Answer

The slope of the contract already aligns the manager's incentives with the firm's profits, so the risk of the manager becoming lazy due to a generous intercept is not a primary concern.

Given a Series of Employment Contracts with the Same Slope