Question

Is it fear for the CEOs of major public corporations to receive exorbitant salaries?

Drawing on agency theory, what is your opinion on this trend? Is it justifiable? Why or why not? What would an ideal formula be in terms of executive compensation for public firm CEOs?

Answer 1

Yes, it is fear for the CEO's of major public corporations to receive exorbitant salaries because it can affect the profitability of the shareholders and can cause a conflict of interest for the owners of the firms which are the shareholders and their main motive which is price maximization of shares. .

As per the agency theory, this is not justified as the salaries of CEO's should be tied up to the profit maximazation of shareholders to prevent conflict of interest or they should be provided with employee stock options in place of large amount in salaries. In case the CEO's are not performing their salaries should be evaluated and should be fired in case of extreme situations. This will create a competitive environment for them too work and take out the best of them.

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