Remuneration: Where We’ve Been, How We Got to Here, What are the Problems, and How to Fix Them

In many ways, Murphy and Jensen’s 1990 paper on CEO pay may have been one of the most influential finance papers written in the past 15 years. It showed not only how CEOs were being paid, but also stressed the importance of incentive based (pay for performance) pay. As I wrote in the summary of that paper for my classes: This is a classic work in the field. It laid the groundwork for much of the executive compensation research that followed.

Now the two stars have again gotten together (with the assistance of Eric Wruck) to produce what may well be considered the definitive look at executive compensation in the post corporate governance crisis era. They not only show how things have changed since 1990 (the pay level has gone way up and options dominate more than anyone would have dreamt in 1990), but also show how things are changing as a result of both accounting scandals (Enron, Etc) as well as the public outcry from Grasso’s compensation from the NYSE and Jack Welch’s pay from GE.

In a move that is often outside of academic writings, the authors also make 38 recommendations that can be used by company Boards of Directors as well as financial market regulators to improve the way executives are rewarded. (As an aside, these recommendations are near the top of the paper and will likely serve as a good executive summary.)
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Editor’s Note: this is a long article (116 pages)

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