Practice question · Multiple choice
Why can a badly designed bonus scheme make governance worse rather than better?
Hints
- Incentives work, including on the wrong target.
- What happens if the bonus keys on this quarter’s reported earnings?
Show the answer
D. It can reward short-term earnings manipulation
Why
Incentive pay transmits whatever signal it measures. Key it to short-run reported earnings and you incentivize accounting games, deferred maintenance, and risk-shifting, alignment turned against the aligner.
Practise Corporate Governance
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