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 that the above features can be fully consistent with efficiency.
Authors: Alex Edmans, Xavier Gabaix
Source: European Financial Management
Subject: Corporate Governance