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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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    File URL: https://mpra.ub.uni-muenchen.de/6969/1/MPRA_paper_6969.pdf
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    References listed on IDEAS

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    5. Rachel M. Hayes & Scott Schaefer, 2000. "Implicit Contracts and the Explanatory Power of Top Executive Compensation for Future Performance," RAND Journal of Economics, The RAND Corporation, vol. 31(2), pages 273-293, Summer.
    6. Murphy, Kevin J., 1997. "Executive compensation and the Modern Industrial Revolution1," International Journal of Industrial Organization, Elsevier, vol. 15(4), pages 417-425, July.
    7. Kay, Neil, 2000. "Searching for the Firm: The Role of Decision in the Economics of Organizations," Industrial and Corporate Change, Oxford University Press, vol. 9(4), pages 683-707, December.
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    10. Pursey P. M. A. R. Heugens & J. A. (Jordan) Otten, 2007. "Beyond the Dichotomous Worlds Hypothesis: towards a plurality of corporate governance logics," Corporate Governance: An International Review, Wiley Blackwell, vol. 15(6), pages 1288-1300, November.
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    12. Jensen, Michael C & Murphy, Kevin J, 1990. "Performance Pay and Top-Management Incentives," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 225-264, April.
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    More about this item

    Keywords

    Executive compensation; corporate governance; theory overview;

    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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