Research and articles


  • An encyclopaedia on executive pay and its effects on firm value

    Edmans, Gabaix, and Jenter (2017): “Executive Compensation: A Survey of Theory and Evidence
    Handbook of the Economics of Corporate Governance, Volume 1

    • ­How much are CEOs paid, in the US and around the world? How has the level and structure of pay changed over time? How does pay differ between public and private firms, and between CEOs and other top executives?
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    • Is high executive pay justified by the value that great CEOs can create? Or does it result from CEOs paying themselves as much as possible and boards and investors rubber-stamping this? Or is executive pay instead shaped by taxation and regulation?
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    • It concludes that “No one perspective can explain all of the evidence, and a narrow attachment to one perspective will distort rather than inform our view of executive pay”
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    • What causes executive pay to vary across firms and industries?
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    • How does executive pay affect firm performance?
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    • What are the questions that we don’t yet know the answers to, which would be worth exploring in future research?
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  • Why has CEO pay increased so much?

    Gabaix, Xavier, and Augustin Landier (2008): “Why Has CEO Pay Increased So Much?
    Quarterly Journal of Economics

    • CEO pay has increased rapidly since the 1980s because firms have grown rapidly since the 1980s. The larger the firm, the greater the impact a good CEO can make, so it’s worth paying top dollar for top talent
    • The same arguments do not apply to the pay of average workers, since their actions are less scalable
    • Even small differences in ability between CEOs can explain large differences in pay, since small differences have large effects when firms are so large
    • Non-technical summary
  • Do CEO incentives work?

    Von Lilienfeld-Toal and Ruenzi (2014): “CEO Ownership, Stock Market Performance, and Managerial Discretion
    Journal of Finance

    • Firms where the CEO has high voluntary share ownership outperform firms where the CEO has low voluntary share ownership by 4-10%/yea
    • This may be because incentives work – when CEOs have more shares, they make better decisions. But causality could be in the other direction – when CEOs know that their firm is likely to do well in the future, they ask to be paid in shares rather than cash
    • The evidence suggests that it’s the former – incentives work. This is because the effects are stronger when the CEO has greater leeway to underperform – institutional ownership is low, takeover defences are strong, and the industry is less competitive
    • Non-technical summary
  • The effects of short-term incentives

    Edmans, Fang, and Lewellen (2017): “Equity Vesting and Investment
    Review of Financial Studies

    • CEOs typically sell their equity when it vests, so they have incentives to boost the short-term stock price. For example, if a CEO was given a large amount of shares in January 2016 with a three-year lock-up period, that period expires in January 2019. So the CEO may try to boost the stock price in January 2019
    • When CEOs have more equity vesting, they cut R&D and capital expenditure, and are more likely to just meet or beat analyst earnings forecasts
    • They also issue positive earnings guidance and sell their equity shortly after
    • Non-technical summary
  • The effects of long-term incentives

    Flammer and Bansal (2017): “Does a Long-Term Orientation Create Value? Evidence From a Regression Discontinuity
    Strategic Management Journal

    • When shareholders pass resolutions to implement long-term pay, the stock price rises. Profitability falls in the short-term but increases in the long-term
    • Innovation improves – both the number and quality of patents
    • Measures of stakeholder value also improve: customers, suppliers, the environment and particularly employees
    • To ensure that a company creates more value for society, it may be more effective to tie CEO pay to the long-term, rather than to cut it and redistribute the savings
    • Non-technical summary
  • The effects of performance-related bonuses

    Bennett et al. (2017): “Compensation Goals and Firm Performance
    Journal of Financial Economics

    • When CEOs have profit targets in their pay schemes, they cut R&D and change accounting policies to try to meet them
    • However, they do not use share buybacks to try to meet them
    • Non-technical summary, with suggestions for pay reform


  • Stop Paying Executives For Performance (Dan Cable and Freek Vermeulen)
    - Argues that CEOs should be paid a flat salary rather than incentives, since CEOs should be intrinsically motivated
    - If the CEO needs incentives to induce value creation, you have the wrong CEO
  • Performance-Based Pay For Executives Still Works (Alex Edmans)
    - Argues that incentives work even for intrinsically-motivated CEOs, by encouraging innovation rather than coasting
    - The long-term stock price is a comprehensive measure that takes into account stakeholder, as well as shareholder, value
  • Sudden Deaths Suggest That Levels of CEO Pay Are Not As Mad As They Seem (Tom Gosling)
    - When CEOs die, firm value falls by 2% on average
    - The market reaction to a death depends significantly on the type of CEO. When younger, shorter-tenure CEOs die, the fall is 4%. When older CEOs die, the market actually rises 3.6%
    - So, CEOs have a significant impact on company value – positive or negative. Not all CEOs create value and deserve high pay, but good ones do
  • Link Executive Pay To Wider Societal Benefits (Alex Edmans)
    - ­Pay reform should focus on “pie-enlarging” (encouraging the CEO to improve long-term firm value to the benefit of all stakeholders) rather than “pie-splitting” (reducing CEO pay to redistribute it to other stakeholders)
  • Simplicity, Transparency, and Sustainability: A New Model For CEO Pay (Alex Edmans)
    - Reform pay by making it simpler, more transparent, and more long-term
  • Equality In Executive Pay Is Not Always Fair (Tom Gosling)
    - Fair pay is pay that is merited by one’s contribution, not pay that is equal across individuals
    - But boards must also ensure that pay is sufficient for all employees to lead a dignified life
    - Firms should publish a Fair Pay Charter discussing how they ensure pay fairness across the organisation
  • Why We Need To Stop Obsessing Over CEO Pay Ratios (Alex Edmans)
    - How the ratio of CEO pay to median worker pay is a misleading measure of pay fairness, and may lead to unintended consequences to manipulate the ratio
    - Proposes other disclosures that may be more effective
  • Simplicity, Not Accuracy, Is What Is Needed in the Pay Ratio Definition (Tom Gosling)
    - Now that pay ratios have to be disclosed in the US and UK, what’s the best way to measure them?
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  • The Purposeful Company Executive Remuneration Report
    - Advocates lengthening the horizon of CEO pay and removing short-term targets
    - Remuneration committee remit should be for pay fairness throughout the organisation, not just in the executive suite
    - Recommends improved disclosure of the link between pay and performance
    - ­ Advocates a binding vote when companies receive 25% opposition to the advisory vote two years in a row
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