Creating Contracts to Avoid Moral Hazard

Anonymous
timer Asked: Dec 11th, 2018
account_balance_wallet $9.99

Question Description

Note: all source must have URL

only slide content and notes needed

no need for graphic or animations

Competency

Demonstrate how economic theory contributes to strategic managerial decision-making.

Course Scenario

Oil Company X is a large oil refinery which has been expanding and taking on new investment projects. Recently, they have considered building a pipeline that stretches across the United States, from Canada to New Orleans.

The Board is in the process of hiring a new CEO for the firm. They are concerned about the problem of moral hazard and want to know how they can reduce or eliminate this via contract. They have tasked you, a team member in the Cost Department, with analyzing the following possible payment systems for the new CEO:

  1. Fixed fee: The new CEO will receive a fixed wage.
  2. Profit sharing: The new CEO receives 15% of the firm's profit, with no wage. The current value of the firm's profit, multiplied times 0.15, is equivalent to the fixed fee wage in option 1.
  3. Stock Options: The new CEO receives a base salary, with additional stock options tied to total profits. The base salary is 10% lower than the fixed fee from option 1, with the additional 10% given in stocks.
  4. Bonuses: The new CEO receives a base salary, with an additional stock bonus which is tied to total revenues. The base salary is 10% lower than the fixed fee from option 1, with the additional 10% given as a bonus tied to the total revenue from the prior year.
  5. Stock Options and Bonus: The new CEO receives a base salary, with additional stock options tied to total profits. The base salary is 10% lower than the fixed fee from option 1, with an additional 5% given in stocks and 5% given in the form of a bonus.

Instructions

You will create a presentation detailing the pros and cons of each potential payment system, including a final recommendation. Be sure to explain whether the firm or the CEO will bear all risk, or if they split the risk with each contract.

Write notes as if explaining this to the Board.

Format your PowerPoint to include a title page, introduction, body slides, conclusion, and references. Remember to cite your sources using correct APA format, and also use correct grammar, spelling, and formatting.

Unformatted Attachment Preview

Grading Rubric F F C B A 0 1 2 3 4 Not Submitted No Pass Competence Proficiency Mastery Introduction and/or conclusion did not summarize a welljustified recommendation. Introduction and/or conclusion did summarize a welljustified recommendation. Introduction and/or conclusion did summarize a welljustified recommendation, and included clear examples. Introduction and/or conclusion did summarize a welljustified recommendation, used clear examples of each, and included a well-defined synopsis of the report goals. Explanation of profit sharing did not summarize the pros and cons. Explanation of profit sharing summarized the pros and cons correctly. Explanation of profit sharing summarized the pros and cons correctly, and used clear examples of each. Explanation of profit sharing summarized the pros and cons, used clear examples of each, and included well-defined reasons for proposal recommendation. Explanation of stock options did not summarize the pros and cons. Explanation of stock options summarized the pros and cons correctly. Explanation of stock options summarized the pros and cons correctly, and used clear examples of each. Explanation of stock options summarized the pros and cons, used clear examples of each, and included well-defined reasons for proposal recommendation. Explanation of fixed fees did not summarize the pros and cons. Explanation of fixed fees summarized the pros and cons correctly. Explanation of fixed fees summarized the pros and cons correctly, and used clear examples of each. Explanation of fixed fees summarized the pros and cons, used clear examples of each, and included well-defined reasons for proposal recommendation. Explanation of bonuses summarized the pros and cons correctly. Explanation of bonuses summarized the pros and cons correctly, and used Explanation of bonuses summarized the pros and cons, used clear examples of each, and included well-defined reasons Not Submitted Not Submitted Not Submitted Not Submitted Explanation of bonuses did not Not summarize the Submitted pros and cons. Not Submitted Explanation of combined stock option and bonus did not summarize the pros and cons. Explanation of combined stock option and bonus summarized the pros and cons correctly. clear examples of each. for proposal recommendation. Explanation of combined stock option and bonus summarized the pros and cons correctly, and used clear examples of each. Explanation of combined stock option and bonus summarized the pros and cons, used clear examples of each, and included well-defined reasons for proposal recommendation. ...
Purchase answer to see full attachment

Tutor Answer

DoctorDickens
School: University of Maryland

Hello, I have uploaded both the draft and the final copy of the assignment. Check both copies.

CREATING CONTRACTS TO AVOID
MORAL HAZARD
Name
Professor
Course name
Due date

INTRODUCTION
• According to Hébert (2017), different financial systems underpin the
services that facilitates the transfer of funds between institutions and their
employees.
• In this case, the new CEO will have the following payment systems in X Oil
Company:
i. Fixed fee
ii. Profit sharing
iii. Bonuses
iv. Stock option and bonuses
• In this presentation, I seek to analyze the pros and cons of the above
payment systems and give the final recommendation one which payment
system is preferable.

FIXED FEE
Pros
• This payment system is a good option from the company’s point of view because,
if the company makes a windfall profit the surplus money will not be paid to the
CEO.
• In project financing, this payment system will be of importance because if it fails
the company will incur minimum loss rather than cost.

FIXED FEE
Cons
• First, the company will bear all the cost since the CEO will be receiving a fixed
salary.
• Lower levels of motivation. The CEO will have a notion of even if he
underperforms he will still his receive his salary.
• Finally, if the CEO is laid back he be at the capacity to always spell bad news of
the company.
In this case, the company will bear all the risk.

PROFIT SHARING
Pros
• Being that the cost of ...

flag Report DMCA
Review

Anonymous
awesome work thanks

Brown University





1271 Tutors

California Institute of Technology




2131 Tutors

Carnegie Mellon University




982 Tutors

Columbia University





1256 Tutors

Dartmouth University





2113 Tutors

Emory University





2279 Tutors

Harvard University





599 Tutors

Massachusetts Institute of Technology



2319 Tutors

New York University





1645 Tutors

Notre Dam University





1911 Tutors

Oklahoma University





2122 Tutors

Pennsylvania State University





932 Tutors

Princeton University





1211 Tutors

Stanford University





983 Tutors

University of California





1282 Tutors

Oxford University





123 Tutors

Yale University





2325 Tutors