Executive Compensation: A Modern Primer
Journal of Economic Literature
vol. 54,
no. 4, December 2016
(pp. 1232-87)
(Complimentary)
Abstract
This article studies traditional and modern theories of executive compensation, bringing them together under a simple unifying framework accessible to the general-interest reader. We analyze assignment models of the level of pay, and static and dynamic moral-hazard models of incentives, and compare their predictions to empirical findings. We make two broad points. First, traditional theories find it difficult to explain the data, suggesting that compensation results from "rent extraction" by CEOs. However, more modern "shareholder value" theories, that arguably better capture the CEO setting, do deliver predictions consistent with observed practices, suggesting that these practices need not be inefficient. Second, seemingly innocuous features of the modeling setup, often made for tractability or convenience, can lead to significant differences in the model's implications and conclusions on the efficiency of observed practices. We close by highlighting apparent inefficiencies in executive compensation and additional directions for future research.Citation
Edmans, Alex, and Xavier Gabaix. 2016. "Executive Compensation: A Modern Primer." Journal of Economic Literature, 54 (4): 1232-87. DOI: 10.1257/jel.20161153Additional Materials
JEL Classification
- G38 Corporate Finance and Governance: Government Policy and Regulation
- M12 Personnel Management; Executives; Executive Compensation
- M48 Accounting and Auditing: Government Policy and Regulation
- M52 Personnel Economics: Compensation and Compensation Methods and Their Effects