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Fact 10.3.1 Executive Pay
Executive compensation, based on performance, can theoretically constrain pay, but companies are paying their top executives more and more. The median compensation of a CEO in 2013 was $13.9 million, up 9 percent from 2012
Source: CNBC, April 28, 2014
-Refer to Fact 10.3.1. CEO compensation schemes are designed to solve
A)the principal-agent problem.
B)the problem of CEOs without long-term labour contracts.
C)the problem of slow and expansive decision-making in a complex management structure.
D)the problem that many CEOs lose all of their wealth if the corporation goes bankrupt.
E)the problem of the CEO being taxed twice-once on salary income and once on dividend income.

Question

Quizplus · Accepted Answer

CEO compensation schemes are designed to solve the principal-agent problem, which arises when the interests of principals (i.e. shareholders) and agents (i.e. CEOs) are not aligned, leading to potential conflicts of interest. By linking executive pay to performance, CEOs are incentivized to act in the best interest of the company and its shareholders. The other options are not relevant to the issue of executive compensation.

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