If executives were paid based on relative performance:
A) compensation would largely be based on luck.
B) there would be less volatility in executive pay.
C) stockholders would find it more difficult to monitor how much the executives are being paid.
D) executives would have less incentive to work hard since ability risk is now high.

Question

Quizplus · Accepted Answer

If executives were paid based on relative performance, it would reduce the volatility of executive pay as it would be tied to the performance of the company relative to its peers. This would lead to executives being rewarded for their performance in a more stable manner. However, it may be challenging for stockholders to monitor how much executives are being paid, and there could be an increase in the ability risk since it is not entirely within the executive's control. But overall, B seems to be the best choice.

If Executives Were Paid Based on Relative Performance