The Compensation Of Chief Executive Officers

1262 Words Dec 9th, 2016 6 Pages
Introduction
The compensation of chief executive officers and the methodology used to determine it has become a major topic of debate in the business world. Many people wonder not only why and how it has gotten to be so high, but also why it isn’t distributed amongst other major contributors inside the company, or even amongst the lower ranks of the workforce via an increase in wage rates. One of the more recent theories that provides an explanation to the increase in the pay of chief executive officers is the size of firms relative to earlier years in business development. Xavier Gabaix (2006, p. 50), states that his, “central equation predicts that a CEOs equilibrium pay is increasing with both the size of his firm and the size of the average firm in the economy.” This theory discusses largely that as the scope of the economy increases, it is only natural that CEOs be compensated at a higher rate. The reasoning behind this is that the CEOs are managing companies of higher value, and thus are in theory putting more work and effort into their companies as well. Based off this theory, it makes complete sense to do this. However, I have set out to see if I can discover any other concrete reasoning behind these often astronomical salaries, and if so, determine if this reasoning is useful in determining salaries across a wide range of industries and structures of very successful publicly traded companies. One of the main reasons I wanted to take a look at both…
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