Advanced Search
MyIDEAS: Login

Executive Compensation in America: Optimal Contracting or Extraction of Rents

Contents:

Author Info

  • Bebchuk, Lucian Arye
  • Fried, Jesse
  • Walker, David I

Abstract

This Paper develops an account of the role and significance of rent extraction in executive compensation. Under the optimal contracting view of executive compensation, which has dominated academic research on the subject, pay arrangements are set by a board of directors that aims to maximize shareholder value by designing an optimal principal-agent contract. Under the alternative rent extraction view that we examine, the board does not operate at arm’s length; rather, executives have power to influence their own compensation, and they use their power to extract rents. As a result, executives are paid more than is optimal for shareholders and, to camouflage the extraction of rents, executive compensation might be structured sub-optimally. The presence of rent extraction, we argue, is consistent both with the processes that produce compensation schemes and with the market forces and constraints that companies face. Examining the large body of empirical work on executive compensation, we show that the picture emerging from it is largely compatible with the rent extraction view. Indeed, rent extraction, and the desire to camouflage it, can better explain many puzzling features of compensation patterns and practices. We conclude that extraction of rents might well play a significant role in US executive compensation; and that the significant presence of rent extraction should be taken into account in any examination of the practice and regulation of corporate governance.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.cepr.org/pubs/dps/DP3112.asp
Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3112.

as in new window
Length:
Date of creation: Dec 2001
Date of revision:
Handle: RePEc:cpr:ceprdp:3112

Contact details of provider:
Postal: Centre for Economic Policy Research, 77 Bastwick Street, London EC1V 3PZ.
Phone: 44 - 20 - 7183 8801
Fax: 44 - 20 - 7183 8820

Order Information:
Email:

Related research

Keywords: agency costs; corporate governance; executive compensation; private benefits of control; rent extraction; stock options;

Other versions of this item:

Find related papers by JEL classification:

References

No references listed on IDEAS
You can help add them by filling out this form.

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Dutta, Sunil & Reichelstein, Stefan J., 2002. "Leading Indicator Variables, Performance Measurement and Long-Term versus Short-Term Contracts," Research Papers 1756, Stanford University, Graduate School of Business.
  2. David de Meza & David C. Webb, 2006. "Incentive design under loss aversion," LSE Research Online Documents on Economics 24523, London School of Economics and Political Science, LSE Library.
  3. David de Meza & David C. Webb, 2004. "Principal agent problems under loss aversion: an application to executive stock options," LSE Research Online Documents on Economics 24676, London School of Economics and Political Science, LSE Library.
  4. Choe, Chongwoo, 2003. "Leverage, volatility and executive stock options," Journal of Corporate Finance, Elsevier, vol. 9(5), pages 591-609, November.
  5. Jenter, Dirk & Kanaan, Fadi, 2008. "CEO Turnover and Relative Performance Evaluation," Research Papers 1992, Stanford University, Graduate School of Business.
  6. Bechmann, Ken L. & Jørgensen, Peter Løchte, 2003. "The Value and Incentives of Option-based Compensation in Danish Listed Companies," Working Papers 2003-2, Copenhagen Business School, Department of Finance.
  7. Wim Fonteyne, 2007. "Cooperative Banks in Europe," IMF Working Papers 07/159, International Monetary Fund.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:3112. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.