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Theories on executive pay. A literature overview and critical assessment

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  • Otten, J.A.

Abstract

Executive pay is a major issue in the corporate governance debate. As well in practice as in theory debate still exists how executive pay levels and structures can be explained. This paper provides an overview of 16 theories that have been used in the literature to explain the phenomenon. The theories can be classified into three types of approaches; 1) the value approach; 2) the agency approach; and 3) the symbolic approach. A critical assessment of the theories shows that the dominant use in the literature of the perfect contracting approach of agency theory neglects: 1) the socially determined symbolic value that executive pay could represent, and 2) the contextual conditions under which executive pay is set. A more conclusive understanding of executive pay would be based on considering executive pay as an outcome of socially constructed corporate governance arrangements in which the actors involved have considerable discretion to influence the outcomes. Incorporating such a view in attempts to explain executive pay provides a more conclusive explanation of the recurrent debate on executive pay in theory and practice.

Suggested Citation

  • Otten, J.A., 2008. "Theories on executive pay. A literature overview and critical assessment," MPRA Paper 6969, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:6969
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    References listed on IDEAS

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    Cited by:

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    3. Anwar Azazi, 2020. "CEO Compensation and Firm Performance in Emerging Market: Evidence from Indonesia Selected Listed Banks," GATR Journals afr191, Global Academy of Training and Research (GATR) Enterprise.

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    More about this item

    Keywords

    Executive compensation; corporate governance; theory overview;
    All these keywords.

    JEL classification:

    • M0 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - General
    • F0 - International Economics - - General
    • M1 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration
    • M5 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics
    • G3 - Financial Economics - - Corporate Finance and Governance
    • B00 - Schools of Economic Thought and Methodology - - General - - - History of Economic Thought, Methodology, and Heterodox Approaches

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