Firms A and B are roughly the same size, but operate in different industries. Firm A bases a high proportion of its executive compensation on net income and a relatively low pro-portion on share price performance. For firm B, these proportions are reversed. Yet, both firms appear to be well managed, consistently profitable, and growing. Use the concepts of sensitivity and precision of a performance measure to explain why both firms’ compensation plans are efficient, despite the differing proportions.
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