Question

(b) Explain how far managerial incentive schemes based on share options and profit targets ensure that managers pursue the goal of maximising shareholder wealth. (5 marks)

Answer 1

Managerial incentive plans based upon share options and profits targets ,are inclined at ensuring that managers are focused on working for the maximization of the shareholder's wealth.

These programs are highly successful as they feel like their personal golas are highly synchronized with the organisational goals. Share options schemes are focused at issuing shares to the employees instead of cash and they also wants to maximize their personal wealth and they work their best for the profit maximaization.

Profits targets based schemes are aimed at providing a share of profits to the employees beyond a specified level of performance and it helps in improving their overall efficiency as they are self-motivated.

SO, These schemes indirectly leads to the profit maximization by inducing managers as an intersting party so, that adds to overall maximization of shareholders wealth to a large extent.