What issues must firm consider-risk aversion-hidden actions

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Reference no: EM131222131

You have been retained by a large Internet-based firm to advise the compensation committee on how best to compensate the chief executive officer (CEO). The CEO is risk-averse and his actions are not fully observable (hidden-action problems).The Internet firm is currently generating tax losses, but if some investments prove successful, it will begin paying taxes in 3 years.

a. What issues must the firm consider, and how might it structure a compensation contract that takes into account the manager’s risk aversion and hidden actions and the tax positions of both the company and the CEO?

Reference no: EM131222131

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