Final answer:
The primary reason for including significant incentive pay in executive compensation is to include both short-term and long-term performance goals. Such a pay structure ensures the CEO is motivated to work towards sustainable success, aligning with shareholder interests. The correct option is b.include both short-term and long-term performance goals.
Step-by-step explanation:
One of the primary reasons for putting significant executive compensation 'at risk' in the form of incentive pay is to include both short-term and long-term performance goals. This approach ensures that executives are motivated to manage the company not only for immediate profits but also for the sustainable success that benefits shareholders in the long run. In the case of Super Mega Corp., with a concerned major shareholder such as Atlas, it's crucial that the new CEO's compensation plan aligns with performance metrics that drive the long-term interest of the owners.
The use of a balanced scorecard to set pay is reflective of this intent, incorporating a range of performance indicators spanning financial results, customer satisfaction, internal business processes, and learning and growth objectives.
In practice, while the board of directors is responsible for making sure the firm is run in the interests of the shareholders, the reality is that top executives have considerable influence over board member selection. This can sometimes create a misalignment of interests unless mechanisms like incentive pay are put in place to ensure executives remain focused on shareholder value. An effective pay-for-performance plan needs to balance incentives to foster both the immediate and the long-term growth and profitability of the firm.