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Executive compensation: a modern primer

Journal

Journal of Economic Literature

Subject

Finance

Publishing details

Journal of Economic Literature 2016 Vol 54:4 p 1232-1287

Authors / Editors

Edmans A;Gabaix A

Biographies

Alex Edmans

Publication Year

2016

Abstract

This article studies traditional and modern theories of executive compensation, bringing them together under a unifying framework. 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 optimal contracting theories find it difficult to explain the data, suggesting that compensation results from "rent extraction" by CEOs. In contrast, more modern theories that arguably better capture the CEO setting do deliver empirically consistent predictions, suggesting that observed 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.

Keywords

Executive compensation; Contract theory; Principal-agent problem; Rent extraction; Optimal contracting

Available on ECCH

No


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