Over the past 25 years CEO pay has risen faster than corporate profits, economic growth, or average wages. A more sensible alternative to the current compensation system would require CEOs to own a lot of company stock. If the stock is given to the boss, his salary and bonus should be docked to reflect its value. As for bonuses, they should be based on improving a company’s cash earnings relative to its cost of capital, not to manipulated measures like earnings per share. Bonuses should not be capped but be unavailable to the CEO for some period of years.
a. What is the economic problem that CEO compensation schemes are designed to solve?
b. How do the proposed changes to CEO compensation outlined in the news clip address the problem you described in part (a)?