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Ceo Compensation Guide

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Ceo Compensation Guide
CEO Compensation
Carola Frydman1 Dirk Jenter2
November 2010

1

Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Massachusetts 02142; email: frydman@mit.edu Graduate School of Business, Stanford University, Stanford, California 94305; email: djenter@stanford.edu

2

Abstract This paper surveys the recent literature on CEO compensation. The rapid rise in CEO pay over the past 30 years has sparked an intense debate about the nature of the pay-setting process. Many view the high level of CEO compensation as the result of powerful managers setting their own pay. Others interpret high pay as the result of optimal contracting in a competitive market for managerial talent. We describe and discuss the empirical evidence on the evolution of CEO pay and on the relationship between pay and firm performance since the 1930s. Our review suggests that both managerial power and competitive market forces are important determinants of CEO pay, but that neither approach is fully consistent with the available evidence. We briefly discuss promising directions for future research.

Key Words
Executive compensation, managerial incentives, incentive compensation, equity compensation, option compensation, corporate governance

Electronic copy available at: http://ssrn.com/abstract=1582232

1. Introduction
Executive compensation is a complex and contentious subject. The high level of CEO pay in the United States has spurred an intense debate about the nature of the pay-setting process and the outcomes it produces. Some argue that large executive pay packages are the result of powerful managers setting their own pay and extracting rents from firms. Others interpret the same evidence as the result of optimal contracting in a competitive market for managerial talent. This survey summarizes the research on CEO compensation and assesses the evidence for and against these explanations. Our review suggests that both managerial power and competitive

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