It is common practice for managers to be rewarded in a way that is tied to the profits of the firm,the sales of the firm,or the return on assets.That is,their remuneration is based on the output of the accounting system.Which of the following is a drawback for such bonus schemes?
A) Bonus schemes tied to the performance of the firm will be put in place to align the interests of the owners and the managers.
B) Rewarding managers on the basis of accounting profits may induce them to manipulate accounting numbers.
C) There would be limited incentives for the manager to adopt risky strategies that increase the value of the firm.
D) The manager may be reluctant to take on optimal levels of debt.

Question

Quizplus · Accepted Answer

Rewarding managers based solely on accounting profits can encourage them to manipulate numbers to reach their targets, which can mislead investors or other parties relying on the accounting data. This may lead to incorrect decision making and a negative impact on the company's long-term performance. Hence, this is a significant drawback of bonus schemes tied to such accounting outputs. Options A and C are incorrect because they discuss the benefits of bonus schemes rather than their drawbacks. Option D is not a major drawback of such schemes; in fact, managers may be encouraged to take on optimal levels of debt to increase profitability.

It Is Common Practice for Managers to Be Rewarded in a Way