The owner's of a small manufacturing concern have hired a manager to run the company with the expectation that he will buy the company after 5 years. Compensation of the new vice president is a flat salary plus 75% of the first $150,000 profit, then 10% of profit over $150,000. Purchase price for the company is set at 4.5 times earnings (profit), computed as average annual profitability over the next five years.
1- Does this contract align the incentives of the new vice president with the profitability goals of the owners?
2- Redesign the contract to better align the incentives of the new vice president with the profitability goals of the owners.