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Executive Compensation: A Survey of Theory and Evidence

Author

Listed:
  • Alex Edmans
  • Xavier Gabaix
  • Dirk Jenter

Abstract

This paper reviews the theoretical and empirical literature on executive compensation. We start by presenting data on the level of CEO and other top executive pay over time and across firms, the changing composition of pay; and the strength of executive incentives. We compare pay in U.S. public firms to private and non-U.S. firms. We then critically analyze three non-exclusive explanations for what drives executive pay - shareholder value maximization by boards, rent extraction by executives, and institutional factors such as regulation, taxation, and accounting policy. We confront each hypothesis with the evidence. While shareholder value maximization is consistent with many practices that initially seem inefficient, no single explanation can account for all facts and historical trends; we highlight major gaps for future research. We discuss evidence on the effects of executive pay, highlighting recent identification strategies, and suggest policy implications grounded in theoretical and empirical research. Our survey has two main goals. First, we aim to tightly link the theoretical literature to the empirical evidence, and combine the insights contributed by all three views on the drivers of pay. Second, we aim to provide a user-friendly guide to executive compensation, presenting shareholder value theories using a simple unifying model, and discussing the challenges and methodological issues with empirical research.

Suggested Citation

  • Alex Edmans & Xavier Gabaix & Dirk Jenter, 2017. "Executive Compensation: A Survey of Theory and Evidence," CESifo Working Paper Series 6585, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_6585
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    File URL: https://www.cesifo-group.de/DocDL/cesifo1_wp6585.pdf
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    Citations

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    Cited by:

    1. Haselmann, Rainer & Krahnen, Jan Pieter & Wahrenburg, Mark, 2019. "Evaluierung gesamt- und finanzwirtschaftlicher Effekte der Reformen europäischer Finanzmarktregulierung im deutschen Finanzsektor seit der Finanzkrise," SAFE Policy Reports 1, Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt.
    2. Lehmann, Erik, 2018. "Corporate governance," UO Working Papers 01-18, University of Augsburg, Chair of Management and Organization.
    3. Matthias Efing & Harald Hau & Patrick Kampkktter & Jean-Charles Rochet, 2018. "Bank Bonus Pay as a Risk Sharing Contract," Working Papers hal-01847442, HAL.
    4. repec:eee:jfinec:v:130:y:2018:i:2:p:392-408 is not listed on IDEAS
    5. Edmans, Alex & Holderness, Clifford, 2016. "Blockholders: A Survey of Theory and Evidence," CEPR Discussion Papers 11442, C.E.P.R. Discussion Papers.
    6. Anne Amar-Sabbah & Pierre Batteau, 2018. "CEO Compensation: Agency Theory is Irrelevant but not the Neoclassical Game-Theoretic Framework," Working Papers halshs-01818600, HAL.
    7. Nicoletta Berardi & Marie Lalanne & Paul Seabright, 2019. "Professional Networks and their Coevolution with Executive Careers," Working papers 723, Banque de France.
    8. repec:eee:ecofin:v:48:y:2019:i:c:p:434-449 is not listed on IDEAS
    9. repec:eee:jfinec:v:130:y:2018:i:2:p:291-307 is not listed on IDEAS
    10. Adams, Renée & Keloharju, Matti & Knüpfer, Samuli, 2018. "Are CEOs born leaders? Lessons from traits of a million individuals," Journal of Financial Economics, Elsevier, vol. 130(2), pages 392-408.

    More about this item

    Keywords

    executive compensation; CEO compensation; managerial incentives; pay-for-performance; corporate governance;

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation

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