Question

Using this executive compensation theory, shareholders negotiate the compensation contracts with the executive in hopes of aligning the executive's interests with theirs. What is the name of this compensation theory?

Answer 1

The principal-agent theory is the compensation theory where shareholders negotiate contracts with executives to align their interests.

Step-by-step explanation:

The executive compensation theory that involves shareholders negotiating compensation contracts with executives to align their interests is called the principal-agent theory. In this theory, the shareholders act as the principals who hire the executives as agents to run the firm on their behalf. The goal is to design compensation contracts that incentivize the executives to make decisions that benefit the shareholders.