The owners of a small manufacturing concern have hired a, Ask an Expert

Economics

The owner's of a small manufacturing concern have hired a manager to run the company with the expectation that he will buy the company after 5 years. Compensation of the new vice president is a flat salary plus 75% of the first $150,000 profit, then 10% of profit over $150,000. Purchase price for the company is set at 4.5 times earnings (profit), computed as average annual profitability over the next five years.

1- Does this contract align the incentives of the new vice president with the profitability goals of the owners?

2- Redesign the contract to better align the incentives of the new vice president with the profitability goals of the owners.

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Business Economics, Economics

Category:- Business Economics
Reference No.:- M91524162

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