Many people believe that CEOS are paid too much for the services they provide. They receive compensation that is far higher than workers’ pay within their firms. The average pay of CEOs at America’s top 350 firms in 2018 was $17.2 million with a CEO-to-typical-worker compensation ratio of 278-to-1. From 1978 to 2018, the inflation-adjusted compensation of the top CEOs increased by 940.3%. The increase was more than 25–33% greater than stock market growth and substantially greater than the painfully slow 11.9% growth in a typical worker’s annual compensation over the same period (Mishel & Wolfe, 2019). However, CEOs may have undue influence over director selection and various company decisions including selecting compensation advisors. This practice creates an unhealthy conflict of interest. Others believe that skilled CEOs can positively affect company performance and the firm needs to offer high compensation to attract the best talent.

1. What unethical activities might managers/executives engage in because of the agency problem?

2. How the corporate governance system reduces agency problems?