Suppose compensation is given by W = 450,000 + 220 π + 15S, where W = total compensation of the CEO, π = company profits (in millions) = $300, and S = sales (in millions) = $500. What percentage of the CEO's total earnings is tied to profits of the firm?

Question

Quizplus · Accepted Answer

The CEO's total compensation is W = 450,000 + 220 π + 15S = 450,000 + 220(300) + 15(500) = 1,215,000. The portion of the CEO's compensation that is tied to profits is 220 π = 220(300) = 66,000. Therefore, the percentage of the CEO's total earnings that is tied to profits is (66,000 / 1,215,000) * 100 = 12.6%.

Suppose Compensation Is Given by W = 450,000 + 220