Problem
In many cases, corporate bonuses are tied to company performance. If the company does well, the CEO gets a bigger bonus. Let's assume that in each year, there is a 20% chance the company loses money, there's a 50% chance the company is moderately successful, and there's a 30% chance the company is wildly successful. A good place to start might be to modify the compensation package you developed in Week 2. Change the annual bonus structure to be dependent on the company performance probabilities. Here's a simple example: Probability Bonus Failure 0.2 $250,000 Moderate success 0.5 $1,000,000 Wildly successful 0.3 $3,000,000 Because multiple years with multiple probabilities can get very complicated, we'll simplify the CEO's contract to 2 years: Year 0 Year 1 Year 2 Year 3 Bonus Signing bonus Annual bonus Annual bonus Annual salary Annual salary Annual salary Like last time, assume the CEO would earn the signing bonus immediately after signing their contract, and that the annual salary is paid to the CEO on January 1st for work they do for the current year, and that the annual bonus is paid on January 1st of the next year. Assuming a discount rate of 12%, what is the expected value of the compensation package NPV? What is the minimum NPV the CEO could earn if the company failed both years? What is the maximum NPV the CEO could earn if the company was wildly successful both years? With the new compensation structure, do you think the CEO would take the job? Do you think the compensation package fairly aligns CEO compensation with company performance? What changes did you make or did you consider making? Why?