There is evidence that CEO compensation follows a “power law” with respect to size of firm: , where is total CEO compensation inclusive of stock options and is measured by, say, stock market valuation or total assets. There is strong evidence that is approximately equal to 1/3.
Suppose that is 500 so that we have
(1)
when
- is measured in millions of dollars, and
- is total firm assets measured in billions of dollars
A. Use equation (1) to calculate for a firm with total assets of 4 billion dollars. Then calculate the simple proportional change in when increases from 4 billion to 6 billion dollars. In calculating values of and the simple proportional change, feel free to round your answers to three decimal places.
