The debate over CEO Compensation
The most visible and highly paid person in most corporations is the chief executive officer (CEO).
Controversy over CEO’s salary has substantially increased in recent years. First major criticism is that the
CEOs are overpaid which doesn’t represent their true contribution to the company. Second major criticism
is that how CEOs are paid. Critics argue that CEOs are the agents of stockholders and their payment should
be heavily based on stock-price performance.
From 1980, the increasing use of stock options and restricted stock grants has boosted the sensitivity of the
average CEO’s wealth to firm performance. However, the absolute sensitivity of the CEO’s wealth to firm
performance remains small. Research indicates that for a $1000 change in firm value, the wealth of an
average CEO in large public corporation changes less than $10. Some argues this relation is too small and
that most companies would be better off if they increased incentive pay for CEOs. Some support of this
view comes from the studies that document an increase in stock-price when companies announce that they
are increasing incentive pay for CEOs.
Based on the above situation answer the following questions:
1. Do you think that most American CEOs are overpaid? Explain.
2. Is it obvious that $10 per thousand is too low of an incentive pay for CEOs? Explain.
3. Does the observation that stock price increase when firms increase incentive pay for CEOs suggest
that most CEOs do not receive enough incentive compensation? Explain.
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