Size, Growth, Profits, and Executive Compensation in the Large Corporation: A Study of the 500 Largest United Kingdom and United States Industrial Corporations

By David J. Smyth; William J. Boyes | Go to book overview

9 Executive Compensation
and Corporate Objectives
in the Rate of Return
Regulated Firm

I INTRODUCTION

For the past decade the implications for resource allocation from rate of return regulation have been a widely debated topic in the United States. Over a decade ago a simple mathematical model of a rate of return regulated firm was developed by Averch and Johnson ( 1962). The model showed that under profit maximisation a firm regulated by rate of return would have a tendency to pad its capital base by employing a higher capital-labour or capital-fuel ratio than was indicated to be optimal for a non-regulated firm producing the same level of output. Recent examination of the Averch-Johnson model has indicated that the type of input misallocation specified by the model depends on the profit-maximising assumption. Under this system of rate of return regulation, different specifications on the objective form leads to many theoretical possibilities for misallocation of resources. The executive compensation analysis undertaken in the previous chapter provides a unique approach to examining the implications of the rate of return regulated model.

The typical public utility in the United States is under the direction of two commissions which dictate the rate of return allowable to the firm. Intra-state sales to customers and the rates charged for these sales, are generally subject to review by a state public-utilities commission. Inter-state sales and rate schedules fall under the jurisdiction of the U.S. Federal Power Commission. In return the utility is usually granted sole franchise over a particular service territory for reasons justified by the traditional characteristics of a decreasing marginal-cost industry. Whenever a utility's rate of return differs

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