Incentive Problem and Consumption of Perquisites

Incentive Problem

Managers may have fixed salary and they may have no incentive to work hard and maximize shareholders wealth. It is as irrespective of the profits they make, their reward is set. Therefore they will maximize leisure and work less that is against the interest of the shareholders.

Consumption of "Perquisites"

Prerequisites consider to the high salaries and generous fringe benefits such the directors might award themselves. This will comprise director's remuneration that will shrink the dividends paid to the usual shareholders. Consequently the consumption of perquisites is against the interest of shareholders while it shrinks their wealth.