A Strikingly High CEO-Worker Pay Gap

Answer the following questions to check your understanding of the story.

Why is CEO pay likely to be much higher than a full-time worker’s pay?

a) CEOs are more committed to their firms.

b) Many people have the skills and experience needed to be a CEO, and firms place a high value on their work.

c) CEOs work longer hours.

d) Few people have the skills and experience (human capital) needed to be a CEO, and firms place a high value on their work.

Wrong! - A large supply of qualified people would tend to lower CEO pay. And commitment and hours worked doesn’t explain why CEO skills are scarce or highly demanded.

Good Job! - CEO skills and experience are scarce, and firms place a high value on their work. Low supply and high demand lead to high pay.

What makes a CEO like a tennis player?

a) Both are in a contest with a big prize for the winner.

b) They are not alike because tennis players don’t work.

c) Both have high earnings.

d) Both enjoy their work.

Wrong! - Tennis players and CEOs may or may not enjoy their work. A tennis player’s job is to play tennis. Why do they both have high earnings?

That's Right! - CEOs and top tennis players participate in contests with similarly skilled contestants, and the big prize awarded to the winner encourages extraordinary effort.

Why do FTSE 100 CEOs earn about 130 times the pay of a full-time U.K. worker?

a) CEOs have 130 times the skills of a full-time U.K. worker.

b) CEOs come from a global talent pool, and firms pay high compensation to attract the best.

c) A CEO has greater value than a worker.

d) A firm can’t operate without a CEO.

Wrong! - The compensation disparity can’t be explained by looking at only one side of the labor market and it doesn’t occur because firms would have difficulty operating without a CEO.

Correct! - With globalization, more firms source their CEOs from a global talent pool and attract the best by rewarding them with significantly high compensation.

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