The problem of horizon happens when the residual claims of a member over the total generated income through an asset is lesser than the asset’s productive life. This problem develops an environment of investment wherein there exists a members disincentive in order to lead towards opportunities of growth (Graham et al 2005). There exists a pressure, consequently over the directors in the board and the higher management with respect to acceleration of redemption of equity at the retained earning expense. It has been suggested by the general horizon problem view that by compensation being given to the members to exit from the investment cooperatives will lead towards improvement of incentives in investment within cooperatives. The view may seem simple but there exist problems with regard to exit payment determination which equals to zero value for the employees. This payment with exit is paid through consistent members and so there is nothing obvious about the equity redemption for members to exit will lead towards incentives of investment being improved.
By reforming the arrangements of pay through build up of equity leads towards freedom being offered to individuals but this does not make any sense from the perspective of performance. Under pay without focusing on performance, leads towards two costs types over shareholders. Firstly it is important for organizations to provide their executives with fresh grants of equity for replenishing the holdings or else the inventive of the executives for generating value to the shareholders will no longer be applicable. These grants of replenishment on economic terms dilute particular shareholders through reduction of ownership fractions for the corporate. If there was ability on the executives for unwinding stocks immediately then the replenishment cost for executive’s positions of equity will also decrease.
Secondly, when executives are able to sell shortly their equity immediately after investment then it leads towards the focus of the executives to be gained more over prices that are short terms. These are the prices on which the executives are able to remove their shares and get rid of their options (Graham et al 2005). However, at any specific time, a large share vested number may have been accumulated by the executives with a wish to unload them some time.