Sample Solution

A significant argument defending substantial compensation for CEOs is their contribution to the high-risk management and increasing shareholder’s equity. Dunlap (1999), contends that while considering the matter of CEO compensation, it is essential to recognise the value that a CEO adds to the company for creating shareholder’s equity and their compensation should be subject to trends in share prices. A connection of CEO compensation with share performance of the company is more suitable. For instance, Bill Gates compensation as the executive of the company in 2003-2004 was subject to trend in company stock price (Gannon, 2004).

However, this is not the case for most of the CEOs. For example, Bhagat and Bolton (2008) evaluated that excessive CEO compensation was one of the significant causes due to which large financial firms had bailed out after the financial crises of 2008. Moreover, according to the Wall Street Journal, in the aftermath of the financial crises, there was a different relationship between firm performance and CEO compensation. This is because even when companies experienced plummeting stock prices, their CEO had received a considerable increase in salaries and bonuses. For instance, the CEO of Cisco Systems, John Chambers, received a compensation of $18.87 million in 2010 while the company’s stock price had plummeted by 31.4% (Lublin and Mattioli, 2012).

An argument supporting the idea that there should be no salary cap for CEO compensation is that CEOs bring value to the company and it is through the excellent strategic management practices that they drive the company to excel in intense competition and enhance prof