problems because managers, who are hired as agents of the shareholders, may pursue their own interests instead. Several mechanisms have evolved to mitigate potential agency problems. First, com- pensation plans tie the income of managers to the success of the firm. A major part of the total compensation of top executives is typically in the form of stock options, which means that the managers will not do well unless the shareholders also do well. Table 1.4 lists the top-earning CEOs in 1999. Notice the importance of stock options in the total compensa- tion package. Second, while boards of directors are sometimes portrayed as defenders of top management, they can, and in recent years increasingly do, force out management teams that are underperforming. Third, outsiders such as security analysts and large institutional I. Introduction 1. The Investment Environment The McGraw−Hill Companies, 2001           CHAPTER 1 The Investment Environment 7     Table 1.4 Highest-Earning CEOs in 1999   Total Earnings Option Component* Individual Company (in millions) (in millions)   L. Dennis Kozlowski Tyco International $170.0 $139.7 David Pottruck Charles Schwab 127.9 118.9 John Chambers Cisco Systems 121.7 120.8 Steven Case America Online 117.1 115.5 Louis Gerstner IBM 102.2 87.7 John Welch General Electric 93.1 48.5 Sanford Weill Citigroup 89.8 75.7 Reuben Mark Colgate-Palmolive 85.3 75.6   *Option component is measured by gains from exercise of options during the year.