Managerial Theory

Introduction
In the investigation of compensation packages for executives and CEO’s the question the writer is trying to answer is whether or not a new approach is better than the old optimal theory. And how to approach companies that give out large incentive pay for performance salaries to executives can be minimized to be in line with the shareholders vision. The two primary approaches are optimal theory and managerial theory.
Key points
The optimal theory and pay for performance is grounded in the historical fabric of American companies. This practice brought about one of the worst financial meltdowns in American history. Shareholders were making substantial profits during the financial meltdown of 2008. Many companies were recording profits and executives were also reaping the benefits of well-constructed pay compensation. Shareholders got executives to act in their best interest; in lay the problem, no one was acting in the best interest of the company. Underestimating the deterioration of the economy many CEO’s continued to ignore the falling interest rates, the signs of the stock market potentially going into a free fall and the growth of the economy. Many companies did not have a clear financial picture of their own company, partly because the executives were busy emulating the books. Prior to the financial meltdown of 2008 the optimal contracting theory was most popular in business. The shareholders wanted high returns and the executives want high incomes for bring them; everyone had their own level of interest.
So the main goal of the performance-pay system is to pay according to concrete results presented by executives; tying stock option and other incentives to performance was a way to build loyalty to the shareholders...

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...elate well with performance. The managerial theory is important because it alludes to a problem with corporate governance, which is design to protect the interests of the owners of a corporation and ensure sound corporate decision-making but in essence it embellish the ambitions of the executives. Here are a few factors that create managerial power imbalance, the process of election of board members, the diversity (level of knowledge) of board members, and the fact that board members often have inadequate bargaining power to challenge managerial decisions and the lack of ability to measure performance. It also creates inefficiencies resulting in excessive compensation that doesn't relate to performance. Due to the public outcry for corporate transparency; managerial power theory goes step further and incorporate new steps to insure the transparency of all companies