ledy) Nornal NoSpa Heading Heading 2 Title Sabite Sulatle Em 5. Supposed you are
ID: 374820 • Letter: L
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ledy) Nornal NoSpa Heading Heading 2 Title Sabite Sulatle Em 5. Supposed you are a member of Company X's Board of Directors and Chairperson of the company's compensation committee. If a company's board of directors want management to maximize shareholders' wealth, should the CEO compensation be set as a fixed amount or should the compensation depend on how well the firm performs? If it is to be based on performance, how should performance be measured7 What factor should your committee consider in setting the CEO's compensation? Would it be easier to measure performance by the growth rate in reported profits or the growth rate in the stocks intrinsic value? Think of both theoretical and practical considerations.Explanation / Answer
CEO's compensation is usually considered to be a mix of fixed and variable components. Here as per the condition, it is required to increase the share holder's wealth. Share holder's wealth increase when the balance sheet of the company is in the profitable state. Let us first understand how the profitability of the business can be increased in some general ways:
Above are some general and basic reasons due to which share price increases. Further, CEO is the key member of the board who is responsible to work over above-mentioned aspects apart from being the company in the profitable state. Hence, compensation of CEO can be determined further by following some ways which must have fixed as well as a variable component:
The salary package is to determine in such a way that it has to work in increasing share holder's value. Strictly it should determine incentives as well de-incentives if required.
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