This paper explains that, according to the classical
economic theory of employee
pay including the Chief Executive Officer (CEO), an employer should pay its employees such that the marginal cost equals marginal productivity; however, contrary to this theory of fair pay, CEO
salaries have been growing much faster than the average worker's pay and thus the productivity of many companies may not be matching that of the increases of pay of the CEO. The author states that the argument for
large salaries for CEOs is that CEOs'
actions influence a large number of people; thus their pay is in line with the stress, responsibilities, their wealth of real life and academic education, their experience and the implications of their actions. The paper concludes that, when a CEO salary plan slants heavily to stock options and
bonuses, which are based on company performance, executives will be encouraged to work hard; however, simply conferring inflated salaries and bonuses do
little to benefit the long-term future of the company and make little economic sense.