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Executive Compensation: Six Questions that Need Answering

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Author Info
John M. Abowd
David S. Kaplan

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Abstract

In this article, we focus on how recent research advances can be used to address the following six questions: (1) How much does executive compensation cost the firm? (2) How much is executive compensation worth to the recipient? (3) How well does executive compensation work? (4) What are the effects of executive compensation? (5) How much executive compensation is enough? (6) Could executive compensation be improved? We stress the formal link between executive pay and performance that is provided by stock options and equivalent forms of long term compensation. We compare executive compensation in 12 OECD countries for the period from 1984-1996. There are good reasons why the answers to the first two questions are different. Executive compensation research should be very careful to distinguish the concepts of employer cost and the value to the executive. Agency theory remains the only viable candidate for answering the question about how executive compensation works but the empirical research to date cannot explain very much about the structure of the optimal contract. For this reason, it is also hard to answer the questions about the effects of executive compensation and the adequacy of the amounts of executive compensation, although it is clear that companies can provide both too little and too much contingent compensation, in the context of agency theory. We suggest two fertile areas for research regarding the improvement of executive compensation.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7124.

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Date of creation: May 1999
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Handle: RePEc:nbr:nberwo:7124

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Find related papers by JEL classification:
J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
G3 - Financial Economics - - Corporate Finance and Governance

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    Other versions:
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Brian J. Hall & Kevin J. Murphy, 2000. "Stock Options for Undiversified Executives," NBER Working Papers 8052, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Patrick Bolton & Marco Becht & Alisa Roell, 2002. "Corporate Governance and Control," NBER Working Papers 9371, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Giannetti, Mariassunta, 2007. "Serial CEO Incentives and the Structure of Managerial Contracts," CEPR Discussion Papers 6422, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  4. Kubo, Katsuyuki, 2001. "Changes in directors' incentive plans and the performance of firms in the UK," CEI Working Paper Series 2001-3, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University. [Downloadable!]
  5. Casamatta, Catherine & Gümbel, Alexander, 2007. "Managerial Legacies, Entrenchment and Strategic Inertia," IDEI Working Papers 442, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
  6. Marco Celentani & Rosa Loveira-Pazó, 2004. "What Form of Relative Performance Evaluation?," Economics Working Papers 744, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
  7. Robert Grams, . "Behavioral and Performance Consequences of U.S. Executive Equity Compensation and Ownership," Working Papers 0803, Industrial Relations Center, University of Minnesota (Twin Cities Campus). [Downloadable!]
  8. Matthias Benz & Marcel Kucher & Alois Stutzer, . "Are Stock Options the Managers' Blessing? Stock Option Compensation and Institutional Controls," IEW - Working Papers iewwp061, Institute for Empirical Research in Economics - IEW. [Downloadable!]
  9. Bouwens, J.F.M.G. & Lent, L.A.G.M. van, 2003. "Effort and selection effects of incentive contracts," Discussion Paper 130, Tilburg University, Center for Economic Research. [Downloadable!]
  10. Peter Christoffersen & Andrey Pavlov, 2003. "Company Flexibility, the Value of Management and Managerial Compensation," CIRANO Working Papers 2003s-06, CIRANO. [Downloadable!]
  11. Bradford Cornell, 2002. "Compensation and Recruiting: Private Universities versus Private Corporations," University of California at Los Angeles, Anderson Graduate School of Management 1042, Anderson Graduate School of Management, UCLA. [Downloadable!]
  12. Chiaki Moriguchi & Emmanuel Saez, 2006. "The Evolution of Income Concentration in Japan, 1886-2002: Evidence from Income Tax Statistics," NBER Working Papers 12558, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  13. Brian J. Hall & Thomas A. Knox, 2002. "Managing Option Fragility," NBER Working Papers 9059, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  14. François Larmande & Jean-Pierre Ponssard, 2004. "EVA and the Controllability-congruence Trade-off: An Empirical Investigation," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  16. François Larmande & Jean-Pierre Ponssard, 2007. "The lack of controllability of EVA explains its decline a field study," Working Papers hal-00243065_v1, HAL. [Downloadable!]
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