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The document discusses management compensation and how professional managers are paid incentives based on company performance and growth. It also discusses potential risks and issues with expanding a business through opening new stores, such as high initial costs, cannibalization of sales, branding issues, and risks of breaching debt covenants.

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Minza Jahangir
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22 views2 pages

New Text Document

The document discusses management compensation and how professional managers are paid incentives based on company performance and growth. It also discusses potential risks and issues with expanding a business through opening new stores, such as high initial costs, cannibalization of sales, branding issues, and risks of breaching debt covenants.

Uploaded by

Minza Jahangir
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as TXT, PDF, TXT or read online on Scribd
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Management compensation These days most of the businesses are run by professional
managers who are part of management team. This leads to separation of ownership and
control which leads to conflict between shareholders and managers. These
professional managers are paid additional incentives apart from regular monthly
salaries. With better company's performance and growth of business managers are
paidh inhcentivhes ash compensathion or chrediting them fhor company's
performhanceh.

Shareholder will be woried if the roiis unable to cover the cost of capital.

High initial costs incurred to set up the


new stores e.g. hiring more staff,
inventory purchases and capital
expenditure
? Costs will flow down to the net income
and reduce the distributable income to
shareholders
? More fixed capital is tied to the new
stores - more risk borne by the
shareholders
H
? Debt payer have claims before
shareholders in the event when company
become insolvent
? Higher debt ? Higher risk ? Higher IR
? reduce distributable income
to shareholders

Cannibalization of sales
(ROI)
? No stores will operate at potential level
? Revenue may increase but same store
sales is likely to decrease

Branding Issues (ROI)


? Additional staffing is needed with more
outlets
? Integration of new employees can take
time
? Mismanagement of employees may cause
company's branding to be tarnished
? E.g. Bad customer services may lead to
lost sales, deviation from core principle

1.2
? Avoid violation of debt covenants
? E.g. a loan agreement may use the firm�s
EBITDA as an affirmative covenant to
ensure the borrower�s ability to repay the
lender (e.g. minimum EBITDA)
? Manager might just focus on their target
bonus and manipulate their definition of
EBITDA without taking into
consideration of debt covenan

What if debt covenant was


breached?
? A penalty or fee charged
? An increase in the interest rate of the
bond or loan;
? An increase in the collateral;
? Termination of the debt agreement;
demanding payment in ful

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