Is CEO Pay Really Inefficient? A Survey of New Optimal Contracting Theories

The authors argue that executive compensation is set by CEOs themselves rather than boards on behalf of shareholders, since many features of observed pay packages may appear inconsistent with the standard optimal contracting theories. However, it may be that the simple models do not capture several complexities of real-life settings. This paper surveys recent theories that extend traditional frameworks to incorporate these dimensions, and show … [ Read more ]

A Unified Theory of Ten Financial Puzzles has a post (with link) about an important finance paper which potentially explains “a host of puzzles.”

Market Forces

It may be tempting to blame greedy CEOs and lazy boards for runaway executive pay. But a study shows top executives’ salaries are rising in direct proportion to top companies’ size and value.

Editor’s Note: as with almost all articles on executive compensation, this one assumes an efficient market for executive talent, which is an assumption I personally disagree with. Feel free to disagree by … [ Read more ]