Answering the questions Essay Example

Incentives Problems

Incentives act as motivation to many company workers but using accounting-based incentives may pose so many problems to the shareholders and the managerial team. Using stock option as the way of measuring incentives may not match managerial compensation with the shareholder’s goals as it may make the executives rich and the shareholders to suffer great losses. The stock option is a powerful way of determining the interests of the managers and the shareholders in a company, but at times, it is not practical to some businesses like Fiat Chrysler Automobile that will be discussed in this paper.

The stock option is affected by the prices of the available stock hence the CEO of a company works towards making it match his goals because when it fall beyond the target, it makes him lose the incentives. CEOs manipulate the stock prices in a particular financial year to make the stock price favorable, but the effect is felt after the target because the earnings and stock level can fall. Sergio Marchionne who is the current CEO heads Fiat Chrysler Automobile. The company is facing massive debts that are resulting in low returns among the shareholders who their earnings is a combination of dividends and price appreciation.

The company shares have also lost their value, and this affected the incentives of the CEO because they lowered with about 70% from what he received in 2014 after the merge that increased the sales. The company’s shareholders were ranked to be among those paid poorly because of the low stock that cannot acquire the targeted returns. The CEO has the strategy on merging the company may save the current situation of lack of high financial support in the business hence increasing the returns that will make him acquire his targeted bonuses and incentives as his pay is the reflection of the company’s performance.

Work Cited

Ross, Stephen A, et al. Essentials of Corporate Finance. 9th ed., McGraw-Hill/Irwin, 2004.