Question

In theory, the CEO hires the consultant to perform an objective analysis of the company's executive pay package and to make whatever recommendations the consultant feels are appropriate; however, in practice, which tends to be the case?

Answer 1

In reality, the objectivity of a consultant's analysis on executive pay might be compromised due to executives' influence over board member selection, despite the theoretical purpose of serving shareholders' interests. Moreover, economic sense is realized by prioritizing activities where one's time is most valuably spent, as with the example of a consultant purchasing vegetables rather than growing them.

Step-by-step explanation:

In theory, a CEO hires a consultant to perform an objective analysis of the company's executive pay package and make appropriate recommendations. However, in practice, there might be issues because top executives often have a significant influence in selecting the board of directors, which can lead to a situation where the company is not entirely run in the shareholders' interests. This could potentially affect the objectivity of the consultant's recommendations regarding executive pay. An example that illustrates the concept of economic trade-offs and opportunity cost is the case of a consultant who earns $200 per hour. It makes more economic sense for her to focus on her consulting work and buy vegetables instead of growing them herself, as her time is more valuable when spent consulting than on less efficient activities.