Quantitative Problems

1.
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A report by Fortune magazine on CEO pay (April 28, 2003) flew under the banner of "Have They No Shame? Their Performance Stank Last Year, Yet Most CEOs Got Paid More Than Ever." What are the primary factors that determine CEO compensation levels? Are they too high?
2.
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What is the primary conflict of interest between the owners of a firm and its top management? Does the principal-agent model provide a useful framework for studying CEO compensation levels?
3.
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Suppose that Betsy, who is a company's CEO, has a stock option contract that allows her to purchase 30,000 shares at the original year 2000 grant price of $120 per share. Under her visionary leadership, the value of the firm has increased by an impressive 30% per annum and this increase has been reflected in the firm's stock price. What is the value of her year 2000 option contract in 2010—a full 10 years after granting?
4.
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A golden parachute is an agreement between the CEO and his employer that specifies he will receive prescribed benefits if his employment is terminated. For example, the Washington Post reported ( January 4, 2007), "Robert L. Nardelli has abruptly resigned as chairman and chief executive of Home Depot, . . . leaving shareholders with a stock that has languished even as sales have nearly doubled during his six-year tenure.

"Under the terms of a separation agreement negotiated when he joined the company in 2000, Nardelli, 58, is to receive about $210 million in cash and stock options." What factors might account for these generous severance agreements that are often negotiated before the CEO joins the firm?

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