Question

You are the chairman of the board of directors for an innovative technology company, and you are looking to hire a new CEO. Your shareholders require an 8% return.

Your firm has 1,200 engineers who on average each contribute $240,000 to the annual revenue of the company and receive an average annual salary of $120,000.

The first candidate for the CEO position, Jane Doe, successfully increased the productive output of engineering employees at her last firm by 5%, and is asking for total annual compensation of $3,500,000 and a three year contract.

The second candidate for the CEO position is a bit of a technology superstar, Alan Musk, and at his last company inspired and increased productive output of engineering employees by 12%, but is asking for total annual compensation of $21,000,000.

Describe in your own words both aspects of the role of the financial manager.

What is the name of the conflict that exists between shareholders and the CEO?

What steps can you take as the chairman of the board of directors to lessen this conflict?

What would be the ratio of the salary of the CEO to the salary of the average engineer if you hire Jane Doe? And for Alan Musk?

Social media influencers are starting to criticize the ratio between the salary of the CEO and your average engineer. What do you say to them?

Answer 1

Role of a financial manager plays in taking important financial decisions, raising equity or issuing an IPO when capital is required. And also to manage the operations of a firm and handle the interests of the shareholders. They develop financial strategies and manage the cash in running the business smoothly. They help raise the money for the firm and increase the value of the firm and manage the cost-cutting with respect to the operations.

Principal and Agent conflict exists in between shareholders and the CEO.

As a chairman of the board of directors, one can help to understand the shareholder's requirement and try to support shareholder's by giving them what the company owe's them in the means of dividend and issuing bonus stocks. And can participate in board meetings with the company management and concern over the shareholder's well-being.

1:10 can be the ratio of the salary of the CEO to the salary of the average engineer if Jane Doe to be hired.

To give a valid reasoning, market standards of hiring an average engineer is 350000 and depending on one's performance the attributed bonus will be given. This is supposed to be the response given to the social media critics.