Sunday, September 21, 2014

Why manager act the best interest to the owner?

Why manager act the best interest to the owner?
A manager will act in the best interest of the owner if the owner is very careful to set incentives for the manager to act in the owner's interest or if the owner closely reviews the work of the manager.

Many (probably most) incentive systems have the unintended consequence of providing incentives to managers which result in actions and decisions not in the interest of the owners. For example, an investment bank gives large bonuses to traders for profitable trading during the past year. As a result, traders take large risks with the owners' money in order to achieve large profits and large bonuses. The next year their bets turn sour and result in huge losses for the owners. The net two-year result is that the traders have made huge bonuses and the owners have taken even larger losses.

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