The disparity in pay of the CEO and the other staff is raising attention to many researchers. The research has been carried out by various stakeholders who include academic, political and regulatory communities. What causing this sharp criticism is the disparity in pay in of the CEO with the other employees who work together with the CEO. There has been am empirical research that has been don e on the same to find out the reason as to why there is this disparity and also to find out the impact it has on the organization. The disparity of CEO pay can best be seen and analyzed using theories like agency theory where it states that there is a nexus of contracts between the owners of the company and others.
The level of taking managerial risks will depend on the internal factors of an organization. This paper together with other studies shows that if there are very high disproportionate CEO rewards, this will be highly protected by the CEOs and will lead to a reduction of risk-taking. The article states that there is individual relationship that exists between each governance measure. The paper also states that when there is pay disparity and a weak governance structure, it will encourage increased presence of entrenchment and will also make the CEOs to be protective. Above all, it will also affect the performance of the firm. The G-Index was also performed to get the meaning of this. The index limits the shareholders to offer punitive measures to top-executives who have the tendency to effect disparate compensation for the subordinates.
The allocation of the resources in a firm is tied to power and authority. The disproportionate allocation of rewards in a firm leads to reduced coordination and contribution from other staff and this will lead to negative firm performance. In cases where the shareholders are poorly represented, the shareholders will find it hard to replace the CEO and this will further lead to entrenchment in the whole process. The paper shows that poor shareholder rights will lead to further entrenchment.