Final answer:
By connecting managerial compensation to performance, a firm's owner can reduce or avoid the principal-agent problem.
Step-by-step explanation:
By connecting managerial compensation to performance, a firm's owner can reduce or avoid the principal-agent problem. This statement is True.
When a firm's owner links compensation to performance, it aligns the interests of the manager (the agent) with those of the firm's owner (the principal). This reduces the principal-agent problem, which refers to the conflict of interest that arises when owners delegate decision-making authority to managers who may not always act in the best interest of the owner.
For example, if a manager's compensation is tied to the firm's profitability, they have an incentive to make decisions and take actions that maximize profits, benefiting the firm's owner. This helps to align the interests of the manager and the owner, reducing the principal-agent problem.