Managerial ownership of a firm’s stock helps align the interests of managers with those of stockholders by increasing the costs to managers of shirking or excessive asset use. It also helps attenuate the horizon problem if share prices quickly adjust to reflect changes in corporate value. On the other hand, large managerial ownership may increase operational efficiency by improving managerial incentives.
Compensation contracts are composed in order to provide managers with incentives and to motivate them at the lowest cost to stockholders. However, these contracts should be enough attractive for managers when they make decisions that create value for stockholders. Therefore, compensation contracts are more important when managers make a lot of decisions that can not be easily controlled. Managerial compensation should be in line with the performance of the management to overcome problems due to lack of mutual interest between shareholders and management. Exessive payment that are being paid to directors should be regulated and should be wholly determined by firm performance.
Remuneration mechanism can provide incentives to managers when it is used effectively. Indeed, remuneration has to be well determined according to performance measures and they should represent the real performance of managers. Moreover, renegotiations of remuneration according to those measures of performance may be an effective way, especially for young managers for whom the present value of future income is large...