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Question: Donald Trump described CEO pay as “a total and complete joke” and “disgraceful”. Critically evaluate the extent to which executive compensation might be a motivator in tournament contests.

06 Oct 2022,12:20 AM

 

Question 1
The High Pay Centre reported that the median FTSE100 chief executive officer took home £2.69 million in 2020. This was the lowest median pay since 2009 and a reduction of 17% from the median CEO pay in 2019 of £3.25 million.
Required
Drawing from academic theory, critically appraise the theories and factors that have driven the growth in executive compensation in the banking and financial sector since the 1990s. Does the reduction in compensation represent the end of rent extraction?
[total 50 marks]

 

Question 2
“Much research has focused on how executive compensation schemes can help alleviate the agency problem in publicly traded companies. To understand adequately the landscape of executive compensation, however, one must recognize that the design of compensation arrangements is also partly a product of this same agency problem”. (Bebchuk and Fried, 2003).
Required
Describe how executive compensation contracts should be constructed to mitigate conflicts between principals and agents. In your discussion, explain how information asymmetries can lead to adverse selection, moral hazard and hidden actions. [total 50 marks]

 

Question 3.
There were seven female FTSE100 CEOs in 2020, the same number as in 2019.
Required
Identify the factors that influence gender pay differentials and constitute barriers to females from progression to the highest hierarchical positions in an organization.

Critically evaluate whether the presence of (more) females in senior executive roles improves corporate firm performance and/or risk taking. [total 50 marks]

 

Question 4.
Crawford, Ezzell and Miles (1995) examine the association between banking deregulation and the pay-performance sensitivity of bank CEO compensation packages.
Required
With specific reference to agency theory and managerial power, critically evaluate how banks integrate the financial reward and business strategies using pay-forperformance mechanisms. [total 50 marks]

 

Question 5.
Donald Trump described CEO pay as “a total and complete joke” and “disgraceful”.
Required
Critically evaluate the extent to which executive compensation might be a motivator in tournament contests. [total 50 marks]

Expert answer

 

Donald Trump's statements about CEO pay could be seen as criticism of how executive compensation is used in tournament contests. Trump may believe that these large payouts are not necessary to motivate executives to do their best work. Instead, he may think that a smaller, more reasonable salary would be more effective in getting executives to compete for the top spot.

 

This is an interesting perspective, and one that could have some validity. However, it's also worth noting that many CEOs are paid based on their performance. In other words, they only receive large payouts if they meet or exceed certain goals. So while Trump's statements may be valid criticisms of how CEO pay is used in some cases, they don't necessarily reflect the reality of how executive compensation works in most cases.

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