Reading 33: Corporate Governance－LOS a

The level of managerial compensation has grown beyond what many consider reasonable. However, this growth is partly due to performance-based compensation. The higher the performance, the greater the payoff from stock and stock option compensation. Stock prices often drop when investments are announced because managers often misuse funds in value wasting projects.

Managers may engage in entrenchment strategies to keep their jobs. As an example, managers may resist hostile takeovers that would result in the loss of their job, even when the takeover would benefit shareholders. Most hostile takeovers benefit shareholders because a higher price is received for their stock in the takeover.

Recent scandals have focused mostly on self-dealing (e.g., plush office decorations) rather than less obvious management deficiencies (e.g., insufficient effort) because it is much more visible and easier to prove.