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Part $1$

A$.$

By tying compensation to$$ performance, the shareholders effectively give the manager an ownership stake in the firm.

B$.$

During the$1990$s$,$ most companies adopted compensation policies that more directly gave managers an ownership stake by including grants of stock or stock options to executives.

C$.$

Increasing the

payminus$$forminus$$performance

sensitivity comes with the added benefit of reducing$$ managers' risk.

D$.$

Stock and option grants give managers a direct incentive to increase the stock price to make their stock or options as valuable as possible.