Fair or excessive? A reliable model for determining the appropriateness of executive compensation

A divergence of interests between a company’s shareholders and executives is at the root of the “agency problem.” No issue illuminates just how acute the problem is than executive compensation. Who’s right and what’s fair compensation. Managers with CalPERS, one of the vocal and visible institutional shareholders, have developed a model that will reveal if a certain executive compensation is warranted or not.

Editor’s Note: my criticism of this model is that is uses an unstated assumption that there are at least some companies under examination which are compensating their executives appropriately – an assumption I don’t necessarily share but in any event is not discussed by the authors…

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