Case Study: the Debate over Ceo Compensation

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CASE STUDY: The Debate over CEO Compensation

The most visible and highly paid person in most corporations is the chief executive officer (CEO). CEO compensation is particularly important to firms for three reasons. First, the compensation package is likely to be important in attracting and retaining good CEOs. Second, the form of the pay contract is likely to help determine whether the CEO focuses on value maximization or some other objective. Third, employees throughout the organization carefully follow their CEO’s pay. Important morale problems can occur when employees think that the CEO is overpaid. For instance, employees complain bitterly when they are asked to take pay cuts because the company is in trouble, yet at the same time the CEO gets a big raise. Controversy over CEO pay has increased substantially in recent years. One charge is that the level of CEO pay is too high. CEO pay is so huge that people don’t believe they deserve it. It is easy to pint to many ECOS who report compensation in the millions of dollars (reported compensation figures typically include salary and bonus payments, as well as gains from the exercise of stock options). Consider the following two examples. Investors were outraged when E Trade Group Inc. disclosed it had paid out a $77 million compensation package for CEO Christos M. Cotsakos in 2001- a year in which the financial-services company lost $242 million. When Cotsakos pledged later to return $21 million, the complaints hardly subsided. In 2001 Qwest Communications posted a $4 billion loss and employees were laid off. However, Qwest’s CEO, Joseph Nacchio, received a $1.5 million bonus, $24 millions in cash, $74 million in exercised options, and was granted 7.25 million in new options. In 1980, CEO compensation was 42 times that of the average worker. In 2000, it was 531 times. The second major…...

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