Question

SHORT ANSWERS

CEO pay, in contrast with pay of a company’s employees, has grown exponentially over the last several decades in the United States. Compare and contrast the two points of view below:

a. Because there exists an agency problem between CEOs, the board of directors, and shareholders, the growing pay gap is reflective of and failure of capitalism and free markets.

b. In a globalized world, where scale and scope have created massive companies unseen before the 1990s, the growing pay gap is reflective of the unique productivity of modern CEOs.

Answer 1

a. Because there exists an agency problem between CEOs, the board of directors, and shareholders, the growing pay gap is reflective of and failure of capitalism and free markets.

a CEO's rise in pay over the time has nothing to do with agency problem. A CEO is a company's pilot and they are generally paid a handsome sum of money to thrive, innovate and expand the business. The aforementioned things surely comes at a cost.

b. In a globalized world, where scale and scope have created massive companies unseen before the 1990s, the growing pay gap is reflective of the unique productivity of modern CEOs.

Indeed globalisation had brought in massive success for a lot of businesses post 1990 but there were successful companies before 1990 too which obviously had CEOs but maybe their role was not as powerful as in today's date. In this era, a company is well known by its CEO. People know that the CEOs are the ones who drive the businesses. The CEOs make a lot of money by bringing in more business which makes it a relative equation of taking a proportion of the value they create. They are paid because they are the masterminds behind the growth in the business.