Pleasing the interested investor: the rational basis for the compensation of corporate executive officers

Abstract

In the aftermath of the Enron scandal, the critics of free enterprise have blamed this system for inflated and out of control executive salaries, particularly those of the chief executive officer (CEO). The present paper defends the marketplace against these charges. In section I we argue that the market has passed the Enron test with flying colors. Section II gives the background of the financial situation relating to CEO salaries. Sections III and IV are devoted to, respectively, the tax court and the appellate court; section V looks at the reaction of the former to the latter; and in section VI we defend the “independent investor” test. We look at this issue from a political economic perspective in section VII and conclude in section VIII.