Final answer:
According to classic economic theory, CEO compensation is determined by market forces, taking into account the efficiency wage as a motivator for productivity and retention.
Step-by-step explanation:
Under classic economic theory, CEO compensation is primarily determined by market forces. This theory posits that in a competitive market, businesses make buying, selling, hiring, and promotion decisions based on economic factors. While factors like internal equity, company profits, and government regulations can influence compensation, classic economic theory focuses on the market as the key determinant. In this context, CEOs, like other employees, may receive an efficiency wage, which is a wage that is higher than market conditions could dictate, in order to boost productivity and incentivize the retention of talent.
Under classic economic theory, CEO compensation is determined by market forces. This means that the salary of a CEO is influenced by the supply and demand dynamics of the labor market for executives. In a competitive market, CEOs who are more productive and have valuable skills and experience are likely to receive higher compensation compared to those with less desirable qualifications.