The Limits of Incentive-Based Contracts
A startup founder needs to hire a CEO to manage the company's daily operations. The founder, who will now act as the chairperson of the board, cannot monitor the CEO's every decision or level of effort. To motivate the CEO, the founder offers a contract consisting of a modest base salary plus a significant share of the company's equity. Analyze why this compensation structure, while intended to align interests, might still lead to the CEO making decisions that are not perfectly in line with the founder's long-term vision for the company. In your answer, distinguish between the intended alignment and the potential for remaining divergence in interests.
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Introduction to Microeconomics Course
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