ECONOMICS 1. The Managerial theories of the firm seek to provide Essay

ECONOMICS 1. The Managerial theories of the firm seek to provide models characterised by realism in motivation, whilst recognising the continued importance of profit in the corporate environment - Essay Example As income taxes have risen over the past historical era, the outright impact of salary or bonus increases has been moderated somewhat. The incremental tax on income in the UK and the US is at about 50%, when all local and national income taxes are taken into account. Thus the standard supply and demand relationship demonstrates a curve, as shown below. Since taxes climb with income, the curve's change in slope is more pronounced: As compared to the turn of the last century, when income taxes were less than 10%, the total impact of increases in wages has therefore moderated. The second influence on this moderation has been the increase on the value of leisure time (Kokoski 1987). As the value of leisure hours has increased, the amount which needs to be paid to offset the value of leisure time has also increased, all else being equal. Group incentives can take the form of income increases (salary and bonus) or non-monetary rewards, such as additional vacation days. From a microeconomics standpoint, there is no difference between group pay incentives and individual pay incentives. There are psychological differences which can be substantial, however, depending on the type of performance being rewarded. An extreme example of the point above is an individual whose personal rewards far exceed those of the group, and in achieving his goals may actually be a detriment to the shareholders. An example of this might be Robert Eaton, who was the Chairman of the Chrysler Corporation at the time that his company was approached by Daimler-Benz. Eaton agreed to a plan whereby Daimler-Benz would merge with Chrysler, and he sold the Board of Directors and employees' unions on the plan. What he didn't reveal was that he stood to gain over $100 million personally if the deal went through. The resulting hue and cry was that Eaton "sold out" Chrysler, which was borne out by subsequent events. Chrysler's largest shareholder at the time, the Tracinda Corporation1, sued Daimler-Chrysler for over $8 billion for erasing nearly $38 billion of market capitalization due to the transaction (CNN 2000). Figure 2: Reduction in share price since merger (CNN 2000) Thus a personal incentive (for Eaton) was in direct opposition to the interests of the shareholders. Stock Options Stock options have the advantage of better alignment with shareholder expectations. The theory is that managers are