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This posting addresses the level of CEO pay.

1.) Most stocks and options awarded or charged to CEOs are not indexed to either industry average or to marketwide averages (e.g., the S&P 500). If the goal is to create incentives for CEOs to increase their companies' value, but also protect them from added risk from stock market fluctuations, does it make sense to index options or not? Explain briefly.

2.) Do you think CEOs are too highly paid (relative to their economic value) or not?
If your answer is Yes, offer an alternative method or formula for how to pay CEOs and briefly explain why a board should use it.
If your answer is No, explain what you would predict would happen if pay was cut (e.g. pay caps were regulated by the Federal government).

Solution Preview

1.) I don't think that they should be indexed for CEOs. The salaries of CEOs are generally among the highest in the country. This gives the CEO more disposable income compared to the average investor. Although this is not always the case, we can justify that because a CEOs salary is higher, he or she can invest more, because he or she has more disposable income that can be allocated to non-stock purchases, thereby freeing up money for stock and option purchases. If the stocks and options given to CEOs were indexed, the risk would increase. As the risk increases, it could be reasonably expected that less CEOs would purchase stocks and options. This could ultimately affect the market, if enough CEOs began ...

Solution Summary

The solution provides a detailed discussion regarding the level of CEO pay and also discusses stocks and options that are awarded or charged to CEOs.