Business & Finance Homework Help

Respond to each classmate 100 words a piece 

Classmate 1 

In my opinion, I do not believe both of these incentives are aligned. If, as stated, the vice president takes $.75 of each dollar earned up to $150,000, which most likely implies he/she will lose motivation after this point. After $150,000 he/she will only earn $.10 on the dollar which is a decreasing marginal benefit but an increasing marginal effort. It becomes obvious that he/she has little incentive to earn over the $150,000. Also, each dollar he/she earns will increase the price he/she will eventually need to pay for the company which is also a disincentive to increase the value of the company. To align this contract with the incentives of both parties I would recommend a redesign. Part of this would include setting a price for the company at the beginning of the contract. This would hopefully motivate the vice president to work to increase profits of the company as much as possible. This is explained by marginal wealth of 10% above $150,000 not being offset by the tremendous increase in purchase price of the company. Lastly, this would motivate him further to increase profits of a company he will own in the near future. It’s very important for both parties involved to have incentives in the contract. Getting off to a good start in partnership will only allow the company to blossom. Another thing is that a fair contract will keep both parties trusting of each other. 

 Classmate 2

Inducements are certain processes that persuade an entity to perform in a particular way, whereas incentives are a type of inducement and on the basis of the structure of incentive it can be positive or negative. The owners expectations is to maximize the profit. The price of the company is 4.5 times the profit. If the Vice President increases the profit, then the person has to pay an higher amount for the purchase of the firm. This would induce the person not to earn too much profit. Which makes it not in line with the owner expectations. 

As specified the goal of the firms owners is to maximize profits but the contract is not aligned to do the same as the new VP wouldn’t try to put much efforts to get profits greater than 150,000 therefore the firms owners profits are not maximized. Instead if the share of the VP is the same throughout, he would go to maximize the total profits as much as possible.