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If a companys board of directors wants management to maximize shareholder wealth, should the CEOs compensation be set as a fixed dollar amount, or should the compensation depend on how well the firm performs? If it is to be based on performance, how should performance be measured? Would it be easier to measure performance by the growth rate in reported profits or the growth rate in the stocks intrinsic value? Which would be the better performance measure? Why?
Shareholders are the owners of the Company and the Board of Directors are the working body having specialized individuals with expertise in various fields. The Board of Directors of the Company should decide the compensation of CEO on the basis of the working of the Firm under his proper guidance. The CEO compensation should be planned in such a way that the CEO should only be rewarded on the basis of performance of the stocks of the Firm. The compensation package should not be determined on the basis of the price of the Firms stocks. Consequently, the Options (or stock rewards) should be segmented in over a number of years, it will act as an incentive for the CEO to maintain the stock price always higher over time. The method of determining the intrinsic value of a stock is very difficult and not always correctly measured. In view of the same, if stocks intrinsic value could be ascertainable, then…

the compensation could be based on the upward or downward movement of the stocks intrinsic value. However, it is easier to determine the growth rate in the informed profits than the stocks intrinsic value, even though the reported profits can be deployed through application of aggressive accounting procedures and the stocks intrinsic value cannot be manipulated. Concluding with the, since the stocks intrinsic value is unnoticeable, CEO compensation should always be based on price of the stock market but the price should always be an average over the time rather on a specific date.

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