Rewarding Failure Over the past 25 years CEO pay has risen faster than corporate profits, economic growth, or average wages. A more sensible alternative to the current compensation system would require CEOs to own a lot of company stock. If the stock is given to the boss, his salary and bonus should be docked to reflect its value. As for bonuses, they should be based on improving a company’s cash earnings relative to its cost of capital, not to more easily manipulated measures like earnings per share. Bonuses should not be capped, but they should be unavailable to the CEO for some period of years.

Source: Fortune, April 28, 2008

a. What is the economic problem that CEO compensation schemes are designed to solve?

b. How do the proposed changes to CEO compensation outlined in the news clip address the problem you described in part (a)?

Use the following news clip to work Problems 7 and 8.

Steps to Creating a Super Startup Starting a business is a complicated and risky task.

Just two-thirds of new small businesses survive at least two years, and only 44 percent survive at least four years. Most entrepreneurs start their businesses by dipping into their savings, borrowing from the family, and using the founder’s credit cards. Getting a bank loan is tough unless you have assets—and that often means using your home as collateral.

Source: CNN, October 18, 2007