Question

If compensation for senior management is based on short-term performance of the firm, in the short run the firm is likely to

Answer 1

The firm will likely overstate how they've performed in the short-term as a way of making sure that the compensation and bonuses are attained. This might affect the company long-term, however, when the performance levels out or decreases under prior levels, and the firm then finds itself wondering what led to the decrease (the overstatement of the short-term).