Refer to Theory in Practice 3.2, in Chapter 3.
a. The Kmart CEO charged by the SEC was hired in May 2000 and fired in March 2002. Despite Kmart losses of $ 3.9 billion for the five quarters ended April 2002, the CEO received total compensation of almost $ 23 million during his tenure. Presumably, much of this compensation was in the form of Kmart shares and ESOs. Awarding manager compensation in the form of company shares and ESOs should, in theory, discourage the type of opportunistic behaviour charged against the Kmart executives. Explain why.
b. The theory seems to have broken down in Kmart’s case. Explain why. Suggest an alter-native, non- opportunistic strategy that management could have adopted to control the damage in response to Kmart’s solvency problem.