Reference no: EM132565303

Hooper Berhad has been heavily criticized by investors and fund managers for both large bonuses paid to executives, and its focus on short term performance. The company recently restructured its executive remuneration scheme to tie executive remuneration more closely to Hooper Berhad's share price performance.

• The scheme gives Ruhan Graves, the chairman and largest shareholder, the chance to earn an annual cash bonus of up to RM20 million. Irisa Adler, the chief executive officer could earn a bonus of RM15 million if the company meets a range of performance targets.
• While Hooper Berhad previous bonus scheme awarded cash based on earnings per share (EPS) growth, now half of the annual bonuses awarded to the top executives are based on three measures which are EPS growth, free cash flow growth and total shareholder return. The other half is based on qualitative factors, which include both financial and non-financial objectives. Changing from one measure of performance to a wide range of performance measures has been seen as a good move by financial analysts as it is in line with what other companies within the industry are doing.

Problem 1: Discuss two agency problems that relate to the relationship between owners and managers?

Problem 2: Briefly explain how linking bonuses to share performance reduce the two agency problems that you outlined above?

Problem 3: Briefly discuss why is it important to link executive bonuses to a range of entity performance measures rather than one as was previously the case with Hooper Berhad.