Which of the following forms of compensation would
encourage management to take on excessive risk?

(b) The requirement is to identify the form of
compensation that would encourage management to take on
excess risk. Answer (b) is correct because with a bonus based
on current period net income, management has an incentive to
take on excessive risk to maximize its bonuses. Answer (a) is
incorrect because a fixed salary encourages management to take
on little risk. Answers (c) and (d) are incorrect because stock
options that cannot be exercised for 10 years and restricted
stock encourage management to be concerned about the longterm
viability of the firm.