Is CEO Pay really Inefficient If so, propose a mechanism to improve Essay

Is CEO Pay really Inefficient If so, propose a mechanism to improve efficiency - Essay Example The inefficiency in CEO’s pay arises because it is very difficult to quantify the productivity of the company and its limit with respect to a certain individual. According to Robert (1995) â€Å"Although much of the decision-making power resides with the CEO, the research and background analysis reports are not made by him. Hence a venture that incurs losses upon the company may not have been caused due a bad decision made by the CEO but rather incomplete or inaccurate information provided to him. These are exemplary scenarios that have more theoretical than practical basis. â€Å" (Robert A. G. Monks, Nell Minow 1995) In today’s world where most business ventures are based solely on the situation in the relevant markets, employee wages are no exception. The general pay of a CEO in competitors would play a large part in deciding the payment package of a company’s CEO.The rest of the essay will be divided into four sections the first three will discuss the vario us aspects of payment while the last would be the concluding statement. Section one will view the entire payment package of a CEO and its implications. These have a strong basis in market evaluation and the integration of the CEO’s position in the company. Section two will discuss the Agency theory. This theory outlines the principal-agent relationship existing between the shareholders and the CEO and its impact on efficient pay. This relationship is both contractually binding and ethical in nature where the extent of the Agent’s authority to bind the company in a contract is deduced by the power given to him by the Principal.. Section three will reflect on the opposing theories of Rent-extraction and the efficient market hypothesis, while both valid in nature, reflects two different sides of an employment contract. Section one: Most CEOs are given the title of either president or CEO. This is a very connotation in the text of CEOs. It is widely used world over. It cou ld mean that the title holders also includes the directors which are present on the board of directors. On the other hand it could also mean the chief operating officer. When compared to the CEO, the president’s central focus is daily operations. CEO, on the other hand is more of a visionary. He projects the future of the company and determines the direction that the company takes. Thus at times, the titles of both president and CEO are used interchangeably to emphasize on the roles that both these title holders play. The increase in pay of a CEO has been six times more than the average wages paid to employees in the last thirty years. The payment package may be seen as inefficient and problematic. An internal sensitivity-analysis of firms indicates that the proportion of loss suffered by the manager when the firm suffers a loss is very small. This amount is greater for small or medium-sized firms as the size of the business increases the loss in pay of the manager decreases when the company suffers a setback. For example, it has been estimated that in a large firm a loss of $1000 by the company only passes on a loss of $1 to the manager who in fact