Is Ceo Compensation Justified by Performance

Topics: Stock, Stock market, Shareholder Pages: 2 (538 words) Published: November 21, 2005
This debate is about whether or not CEOs deserve their multimillion dollar salaries. According to Kevin J Murphy (professor of finance and business economics), CEO compensation is justified because CEOs increase stock prices which, in turn, increases shareholder wealth. In contrast, Lisa H Newton (professor of philosophy) argues that CEO compensation is not justified due to the large disparity between CEO salaries and the salary of an average worker. She also argues that high CEO salaries "bad stewardship of resources." I will go into detail about both of their arguments in the next couple of paragraphs.

Murphy asserts that pay for CEOs is indicative of their level of performance as long as pay is based upon stock performance. Thus Murphy believes that CEOs should be rewarded for actions that benefit shareholders and punished for actions that harm shareholders. Murphy provides evidence that annual increases in salary for CEOs are positively correlated with the rate of return on stock. In response to the criticism that rewarding CEOs for current stock performance focuses on short term profit rather than on the long term Murphy argues that current stock market performance is an appropriate measure of long term potential. Therefore current stock performance is an appropriate basis for CEO compensation. Murphy also argues that other incentives for the CEO have even closer ties to company performance than salary. For example, stock options restricted stock, and long term performance plans are determined directly by company performance.

Newton strongly disagrees with Murphy and argues that CEO's salaries are completely unjust from a "world perspective." Newton presents several top CEO salaries ranging from $21.4 million to $102.4 million and compares them to the average annual compensation of African workers (which ranges from $100 to $300 in many 3rd world countries). Newton claims that this disparity provides strong evidence that CEO compensation in the United...
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