CONFLICTS OF INTEREST - CFA UK · CONFLICTS OF INTEREST - CFA UK
Incentive Conflicts
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IncentiveRestaurant Owners and ManagersConflicts
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1.Discuss the incentive
conflicts that are likely to arise between owners and managers of a restaurant
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What causes
Incentive Conflict?
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Individuals tend to make decisions that benefit their
personalWell - Being
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Tend to have goals in line with their firm (restaurant)
OwnersManagers
- Whereas -May not share these same goal’s, as they are not entitled toThe excess return$
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5The textbook outlines
Root causesFor Owner – Manager Incentive conflicts
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Choice
Additional effort by a manager
Of ~Effort~
INCREASESthe value of the restaurant
But
DECREASESTheir utility of time (leisure)
No1.
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PerquisiteTaking. It is in the best interest of the owner to pay sufficient salaries to the managers to retain competent workers.
OWNERS ALSO DO NOT WISH
TO OVERPAY THEIR WORKERS.
REVENUE - COSTS = PROFIT
No2.
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PerquisiteTaking. (Continued) Not only do managers seek high salary's, but perquisites such as clubs, vacations, daycare and dental plans.. Etc
No2.
U = f(C,P)U = utility, C = compensation, P = perks!
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ExposureExposure
Differential
Managers may forgo expensive projects that they anticipate to be profitable simply because they do not want to bear the risk of failure..
RiskExposure
No3.
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Differential horizons ”Managers claims to the firm are limited by their tenure”
No4
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Differential horizonsTherefore, managers have limited incentive to care about the future of the firm.
No4.
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Managers can be reluctant to reduce the size of their firm. Even if it is the more profitable option.
Overinvestment
Manager bear a personal cost (disutility), when firing a colleague
No5.
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2.Do you anticipate that
the conflicts will be easier or harder to control at the new salt lake location?
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HARDER.
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Although there are many ways to monitor restaurants using technology, the physical distance between HQ and Salt Lake City puts the new location at aDISADVANTAGE.
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Staff members who develop close personal relationshipswith their coworkers are much more likely to stay with a Company.
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Without a strong owner-manager relationship there may be “differential horizons”.
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“When an employee knows they’re truly valued and that their boss has a genuine interest in them, they’re much more likely to perform well.” - Forbes magazine
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3.Should you offer the new
head manager at the Salt Lake location the same compensation contract that you are using for the five managers in Portland?
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Given the autonomous nature of the new head manager.
I would entice the manager with stock options or a larger bonus.
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As part of fringe benefits, I would add an annual paid trip to Portland so the manager
can see our headquarters.
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This would let manager develop a closer bond to the owner and overall brand.
In effect, incentivizing their work.
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Thanks for reading!