(iv) As a CEO Obama Company, you are going to depend the good remuneration. From this perspective, what do you think management perspective in assuring the remuneration is satisfied by the CEO?

CEO as the principal and management as the agent. The relationship between these two parties is to perform some service on principals’ behalf which involves delegating some decision making authority to the agents. Both are the utility maximizers. As a principal, he/she wish to have high dividend whereas agent wish to have high bonus. So that, to ensure that both can be achieved, they should be able to avoid conflict which is known as agency cost in order to reduces agency cost.

Agency cost was involve costs to the principals. When principals and agents have different interest and the agent has more information, the principals cannot directly ensure that its agent is always acting in its best interest. In order to ensure the remuneration was satisfied by the CEO, the CEO (principals) and the manager (agent) ought to have high level of motivation that contributes to the smooth flow of information between them.

On the management perspective, to assuring the remuneration is satisfied by the CEO is using the bonus plan hypothesis. Earning based bonus are typically provide for managers to share some portion of reported profit. Since compensation is tied to the level of reported profits, it has been hypothesised that, in the presence of these plans, managers will select accounting procedures that shift reported profit from future periods to current periods. When managers (agents) have information on the firm’s net income, they will manage the net income so as to maximize their bonuses under the compensation plans. Indirectly, when the manager manage to get high reported net profit, it will contributes to the good remuneration to the