Goal Alignment at a Small Manufacturing Concern. The owners of a
small manufacturing concern have hired a manager to run the company with the
expectation that he will buy the company after five years. Compensation of the
new vice president is a flat salary plus 75% of first $150,000 of profit, and then
10% of profit over $150,000. The purchase price for the company is set as 4½
times earnings (profit), computed as average annual profitability over the next
five years. Does this contract align the incentives of the new vice president with
the goals of the owners?