Working Paper: NBER ID: w23596
Authors: Alex Edmans; Xavier Gabaix; Dirk Jenter
Abstract: This paper reviews the theoretical and empirical literature on executive compensation. We start by presenting data on the level of CEO and other top executive pay over time and across firms, the changing composition of pay; and the strength of executive incentives. We compare pay in U.S. public firms to private and non-U.S. firms. We then critically analyze three non-exclusive explanations for what drives executive pay -- shareholder value maximization by boards, rent extraction by executives, and institutional factors such as regulation, taxation, and accounting policy. We confront each hypothesis with the evidence. While shareholder value maximization is consistent with many practices that initially seem inefficient, no single explanation can account for all facts and historical trends; we highlight major gaps for future research. We discuss evidence on the effects of executive pay, highlighting recent identification strategies, and suggest policy implications grounded in theoretical and empirical research. Our survey has two main goals. First, we aim to tightly link the theoretical literature to the empirical evidence, and combine the insights contributed by all three views on the drivers of pay. Second, we aim to provide a user-friendly guide to executive compensation, presenting shareholder value theories using a simple unifying model, and discussing the challenges and methodological issues with empirical research.
Keywords: Executive Compensation; Corporate Governance; Performance Incentives
JEL Codes: D31; D86; G34; M12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| shareholder value maximization (G34) | executive compensation (M12) |
| rent extraction (H13) | executive compensation (M12) |
| executive compensation (M12) | firm performance (L25) |
| firm performance (L25) | executive compensation (M12) |
| executive compensation sensitivity to performance (M12) | firm value (G32) |