Paulo owns a few shares of stock in a large and diversified firm. He realizes that the CEO of the company is responsible for a multi-billion dollar business, but is upset with what he feels is excessive compensation for the chief executive officer, particularly since the firm has reported losses for the past two years. Paulo's concerns are:
A)unfounded, since laws in the United States prevent firms from paying large salaries or bonuses to executives when a firm reports a loss.
B) based on an erroneous conclusion, because CEO pay is always based on a formula tied to the company's profits and losses.
C)likely to be well-founded since CEO compensation at many U.S. companies has actually increased even when the company performed poorly.
D)not entirely unfounded, but he needs to realize that the pay received by most chief executives must be reinvested in the company if it's unprofitable for three years in a row.

Question

Quizplus · Accepted Answer

Paulo's concerns are likely well-founded, as it is true that CEO compensation has often increased even when a company performs poorly. While there are laws and regulations surrounding executive pay, they are not always effective in preventing excessive compensation in practice. Additionally, it is not necessarily true that CEO pay is always tied to the company's profits and losses - there are many factors that can influence executive compensation, including things like stock options and bonuses that may not be directly linked to the financial performance of the company. The statement in option D - that CEO pay must be reinvested in the company if it is unprofitable for three years in a row - is not accurate. While some companies may have policies or agreements in place that link executive pay to organizational performance, this is not a legal requirement.

Paulo Owns a Few Shares of Stock in a Large