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The Ombudsman: A Closer Look at the Efficiency of Top Executive Pay and Incentives

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  • Christopher S. Armstrong

    (The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104)

Abstract

Jacquart and Armstrong [Jacquart P, Armstrong JS (2013) Are top executives paid enough? An evidence-based review. Interfaces 43(6):580–589] offer a series of provocative recommendations aimed at improving current executive compensation practices. I argue that when executive compensation contracts are designed to achieve multiple goals, an efficient contract may call for the executive to be paid rents, which could be mistaken for excess compensation. I also discuss how the popular notion that executive compensation contracts exhibit little, if any, pay for performance is largely inaccurate, because it focuses exclusively on annual pay rather than on the change in an executive’s overall wealth. In particular, when changes in the value of executives’ stock and option holdings are taken into account, executive compensation contracts tend to exhibit substantial pay for performance.

Suggested Citation

  • Christopher S. Armstrong, 2013. "The Ombudsman: A Closer Look at the Efficiency of Top Executive Pay and Incentives," Interfaces, INFORMS, vol. 43(6), pages 590-592, December.
    • Handle: RePEc:inm:orinte:v:43:y:2013:i:6:p:590-592
    DOI: 10.1287/inte.2013.0706
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    References listed on IDEAS

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    1. Tamer, Elie, 2010. "Partial Identification in Econometrics," Scholarly Articles 34728615, Harvard University Department of Economics.
    2. Christopher S. Armstrong & David F. Larcker & Che-Lin Su, 2010. "Endogenous Selection and Moral Hazard in Compensation Contracts," Operations Research, INFORMS, vol. 58(4-part-2), pages 1090-1106, August.
    3. Philippe Jacquart & J. Scott Armstrong, 2013. "The Ombudsman: Are Top Executives Paid Enough? An Evidence-Based Review," Interfaces, INFORMS, vol. 43(6), pages 580-589, December.
    4. Armstrong, Christopher S. & Vashishtha, Rahul, 2012. "Executive stock options, differential risk-taking incentives, and firm value," Journal of Financial Economics, Elsevier, vol. 104(1), pages 70-88.
    5. Low, Angie, 2009. "Managerial risk-taking behavior and equity-based compensation," Journal of Financial Economics, Elsevier, vol. 92(3), pages 470-490, June.
    6. Elie Tamer, 2010. "Partial Identification in Econometrics," Annual Review of Economics, Annual Reviews, vol. 2(1), pages 167-195, September.
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    Cited by:

    1. J. Scott Armstrong & Philippe Jacquart, 2013. "The Ombudsman: Is the Evidence Sufficient to Take Action on Executive Pay? Reply to Commentators," Interfaces, INFORMS, vol. 43(6), pages 602-604, December.

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