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Principal agent theory and empirical evidence

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Answer the following sub-questions using economic theory, the principal agent theory and empirical evidence.

a) Most UK and American CEOs are paid significantly more than the average employee of their firms. Does this fact suggest that CEOs are overpaid? French and German CEOs earn considerably less than US CEOs, does this suggest that US CEOs are overpaid?

b) The firm's stock market price is uncorrelated with the FTSE100 index. In economic terms, does it make sense to pay the firm's CEO based on the FTSE100 index? Explain.

c) Taking into account the article by Bebchuk et al "The Wages of Failure", discuss the advantages and disadvantages of incentive pay and the problems of incentive pay in the case of Bear Stearns and Lehman Brothers. Also discuss reforming incentive pay to deal with the problems unearthed at Bear Stearns and Lehman Brothers.

Reference no: EM132766782

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