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Executive Compensation: A Survey of Theory and Evidence


  • Alex Edmans
  • Xavier Gabaix
  • Dirk Jenter


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," NBER Working Papers 23596, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:23596
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    Cited by:

    1. Juan Carlos Conesa & Begona Dominguez, 2020. "Capital Taxes and Redistribution: The Role of Management Time and Tax Deductible Investment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 37, pages 156-172, July.
    2. Gan, Liu & Xia, Xin, 2019. "Idiosyncratic risk, managerial discretion and capital structure," International Review of Economics & Finance, Elsevier, vol. 64(C), pages 586-599.
    3. Alex Edmans & Luis Goncalves-Pinto & Moqi Groen-Xu & Yanbo Wang, 2018. "Strategic News Releases in Equity Vesting Months," Review of Financial Studies, Society for Financial Studies, vol. 31(11), pages 4099-4141.
    4. Lehmann, Erik, 2018. "Corporate governance," UO Working Papers 01-18, University of Augsburg, Chair of Management and Organization.
    5. Illiashenko, Pavlo & Laidroo, Laivi, 2020. "National culture and bank risk-taking: Contradictory case of individualism," Research in International Business and Finance, Elsevier, vol. 51(C).
    6. Andrés, Pablo de & Arranz-Aperte, Laura, 2019. "Are European CEOs paid equally? A study of the UK-continental Europe pay gap," Finance Research Letters, Elsevier, vol. 29(C), pages 169-177.
    7. Daniel Beck & Gunther Friedl & Peter Schäfer, 2020. "Executive compensation in Germany," Journal of Business Economics, Springer, vol. 90(5), pages 787-824, June.
    8. Juan Carlos Conesa & Begona Dominguez, 2020. "Capital Taxes and Redistribution: The Role of Management Time and Tax Deductible Investment," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 37, pages 156-172, July.
    9. Matthias Efing & Harald Hau & Patrick Kampkktter & Jean-Charles Rochet, 2018. "Bank Bonus Pay as a Risk Sharing Contract," Working Papers hal-01847442, HAL.
    10. Ewens, Michael & Nanda, Ramana & Stanton, Christopher, 2020. "The Evolution of CEO Compensation in Venture Capital Backed Startups," SocArXiv rku3m, Center for Open Science.
    11. Abudy, Menachem (Meni) & Amiram, Dan & Rozenbaum, Oded & Shust, Efrat, 2020. "Do executive compensation contracts maximize firm value? Indications from a quasi-natural experiment," Journal of Banking & Finance, Elsevier, vol. 114(C).
    12. Huang, Ying Sophie & Li, Mengyu, 2019. "Are overconfident executives alike? overconfident executives and compensation structure: Evidence from China," The North American Journal of Economics and Finance, Elsevier, vol. 48(C), pages 434-449.
    13. Gryglewicz, Sebastian & Mayer, Simon & Morellec, Erwan, 2020. "Agency conflicts and short- versus long-termism in corporate policies," Journal of Financial Economics, Elsevier, vol. 136(3), pages 718-742.
    14. Chaigneau, Pierre & Edmans, Alex & Gottlieb, Daniel, 2018. "Does improved information improve incentives?," Journal of Financial Economics, Elsevier, vol. 130(2), pages 291-307.
    15. 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.
    16. Haselmann, Rainer & Krahnen, Jan Pieter & Wahrenburg, Mark, 2019. "Evaluierung gesamt- und finanzwirtschaftlicher Effekte der Reformen europäischer Finanzmarktregulierung im deutschen Finanzsektor seit der Finanzkrise: Zusammenfassung der wichtigsten Ergebnisse," SAFE Policy Reports 2, Leibniz Institute for Financial Research SAFE.
    17. Edmans, Alex & Holderness, Clifford, 2016. "Blockholders: A Survey of Theory and Evidence," CEPR Discussion Papers 11442, C.E.P.R. Discussion Papers.
    18. Anne Amar-Sabbah & Pierre Batteau, 2018. "CEO Compensation: Agency Theory is Irrelevant but not the Neoclassical Game-Theoretic Framework," Working Papers halshs-01818600, HAL.
    19. Nicoletta Berardi & Marie Lalanne & Paul Seabright, 2019. "Professional Networks and their Coevolution with Executive Careers," Working papers 723, Banque de France.
    20. Na, Ke, 2020. "CEOs’ outside opportunities and relative performance evaluation: evidence from a natural experiment," Journal of Financial Economics, Elsevier, vol. 137(3), pages 679-700.

    More about this item

    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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