What is false regarding compensation plans for employees and management?

A. Employees often regard the company's stability and growth is more important than equity-oriented participation plans such as profit-sharing.
B. A well-designed management compensation scheme can reduce but not eliminate agency costs.
C. If the management compensation is not enough, the management may engage an 'empire building' practice.

Correct Answer: C

A is true. Employees have a direct financial stake in their employer through equity-oriented participation plans and in the company's long-term growth. Equity ownership is a minor part of compensation and less important than the company's stability and growth.

B is also true. C is false. The reason for empire building is that the compensation is tied to the size of the business.