Sydney Finkelstein, Donald C. Hambrick, and Albert A. Cannella
- Published in print:
- 2008
- Published Online:
- January 2009
- ISBN:
- 9780195162073
- eISBN:
- 9780199867332
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780195162073.003.0010
- Subject:
- Business and Management, Strategy
Research on the determinants of executive compensation has a very long tradition in a variety of academic fields. This chapter focuses on the key ideas that emerge from a review of this work, ...
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Research on the determinants of executive compensation has a very long tradition in a variety of academic fields. This chapter focuses on the key ideas that emerge from a review of this work, especially in the management literature. Executive pay is generally determined by economic factors, social factors, and political factors, each of which is examined in this chapter. Economic factors include size, performance, human capital, risk, and marginal product. Managerial discretion, discussed in Chapter 2, also plays a big role. Social factors tend to fall into three categories—institutional pressures, social comparison processes, and social capital—each of which suggests alternative predictors of executive compensation. Finally, political factors are very much about power. The chapter concludes with a short section on the compensation of general managers at a business-unit level.Less
Research on the determinants of executive compensation has a very long tradition in a variety of academic fields. This chapter focuses on the key ideas that emerge from a review of this work, especially in the management literature. Executive pay is generally determined by economic factors, social factors, and political factors, each of which is examined in this chapter. Economic factors include size, performance, human capital, risk, and marginal product. Managerial discretion, discussed in Chapter 2, also plays a big role. Social factors tend to fall into three categories—institutional pressures, social comparison processes, and social capital—each of which suggests alternative predictors of executive compensation. Finally, political factors are very much about power. The chapter concludes with a short section on the compensation of general managers at a business-unit level.
Sydney Finkelstein, Donald C. Hambrick, and Albert A. Cannella
- Published in print:
- 2008
- Published Online:
- January 2009
- ISBN:
- 9780195162073
- eISBN:
- 9780199867332
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780195162073.003.0011
- Subject:
- Business and Management, Strategy
The consequences of executive pay are complex and particularly rich in a theoretical and practical sense. This chapter examines one of the most fundamental questions in this regard: Does executive ...
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The consequences of executive pay are complex and particularly rich in a theoretical and practical sense. This chapter examines one of the most fundamental questions in this regard: Does executive pay affect firm performance? The evidence is decidedly mixed, but raises key questions about pay as a motivator, and the different ways in which executive pay can influence strategic and organizational choices as well as firm performance. This chapter also considers the burgeoning literature on behavioral agency theory, which leads naturally to a comparison of the effects of different types of compensation, especially stock options. A significant part of this chapter is dedicated to an analysis of the determinants and consequences of pay differentials among top management teams, another area of great theoretical interest. Studying pay differentials (or pay dispersion), as well as the pattern of compensation in place among the CEO and other top managers, yields fascinating insights that have important consequences for teamwork, perceived fairness of pay, strategic decision making, and firm performance.Less
The consequences of executive pay are complex and particularly rich in a theoretical and practical sense. This chapter examines one of the most fundamental questions in this regard: Does executive pay affect firm performance? The evidence is decidedly mixed, but raises key questions about pay as a motivator, and the different ways in which executive pay can influence strategic and organizational choices as well as firm performance. This chapter also considers the burgeoning literature on behavioral agency theory, which leads naturally to a comparison of the effects of different types of compensation, especially stock options. A significant part of this chapter is dedicated to an analysis of the determinants and consequences of pay differentials among top management teams, another area of great theoretical interest. Studying pay differentials (or pay dispersion), as well as the pattern of compensation in place among the CEO and other top managers, yields fascinating insights that have important consequences for teamwork, perceived fairness of pay, strategic decision making, and firm performance.
Bert Cannella, Sydney Finkelstein, and Donald C. Hambrick
- Published in print:
- 2008
- Published Online:
- January 2009
- ISBN:
- 9780195162073
- eISBN:
- 9780199867332
- Item type:
- book
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780195162073.001.0001
- Subject:
- Business and Management, Strategy
This book integrates and assesses the vast and rapidly growing literature on strategic leadership, which is the study of top executives and their effects on organizations. The basic premise is that, ...
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This book integrates and assesses the vast and rapidly growing literature on strategic leadership, which is the study of top executives and their effects on organizations. The basic premise is that, in order to understand why organizations do the things they do, or perform the way they do, we need to comprehend deeply the people at the top—their experiences, abilities, values, social connections, aspirations, and other human features. The actions—or inactions—of a relatively small number of key people at the apex of an organization can dramatically affect organizational outcomes. The scope of strategic leadership includes individual executives, especially chief executive officers (CEOs), groups of executives (top management teams, or TMTs), and governing bodies (particularly boards of directors). Accordingly, the book addresses an array of topics regarding CEOs (e.g., values, personality, motives, demography, succession, and compensation); TMTs (including composition, processes, and dynamics); and boards of directors (why boards look and behave the way they do, and the consequences of board profiles and behaviors). The book synthesizes what is known about strategic leadership and indicates new research directions.Less
This book integrates and assesses the vast and rapidly growing literature on strategic leadership, which is the study of top executives and their effects on organizations. The basic premise is that, in order to understand why organizations do the things they do, or perform the way they do, we need to comprehend deeply the people at the top—their experiences, abilities, values, social connections, aspirations, and other human features. The actions—or inactions—of a relatively small number of key people at the apex of an organization can dramatically affect organizational outcomes. The scope of strategic leadership includes individual executives, especially chief executive officers (CEOs), groups of executives (top management teams, or TMTs), and governing bodies (particularly boards of directors). Accordingly, the book addresses an array of topics regarding CEOs (e.g., values, personality, motives, demography, succession, and compensation); TMTs (including composition, processes, and dynamics); and boards of directors (why boards look and behave the way they do, and the consequences of board profiles and behaviors). The book synthesizes what is known about strategic leadership and indicates new research directions.
Stephen M. Bainbridge
- Published in print:
- 2012
- Published Online:
- May 2012
- ISBN:
- 9780199772421
- eISBN:
- 9780199932696
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199772421.003.0005
- Subject:
- Law, Company and Commercial Law
Both Sarbanes–Oxley and Dodd–Frank included new executive compensation regulations. A key question is whether these provisions addressed actual corporate governance failures or were simply a sop to ...
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Both Sarbanes–Oxley and Dodd–Frank included new executive compensation regulations. A key question is whether these provisions addressed actual corporate governance failures or were simply a sop to populist outrage. In either case, one must also ask whether the new restrictions are likely to be effective. It is argued that the one-size-fits-all approach mandated by the Sarbanes–Oxley Act and the new self-regulatory organization listing standards is seriously flawed.Less
Both Sarbanes–Oxley and Dodd–Frank included new executive compensation regulations. A key question is whether these provisions addressed actual corporate governance failures or were simply a sop to populist outrage. In either case, one must also ask whether the new restrictions are likely to be effective. It is argued that the one-size-fits-all approach mandated by the Sarbanes–Oxley Act and the new self-regulatory organization listing standards is seriously flawed.
John D. Martin, J. William Petty, and James S. Wallace
- Published in print:
- 2009
- Published Online:
- September 2009
- ISBN:
- 9780195340389
- eISBN:
- 9780199867257
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780195340389.003.0008
- Subject:
- Economics and Finance, Macro- and Monetary Economics, Financial Economics
This chapter presents a fundamental component of every firm's internal control system, its compensation program. The basic paradigm espoused by the proponents of VBM is that what a firm measures and ...
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This chapter presents a fundamental component of every firm's internal control system, its compensation program. The basic paradigm espoused by the proponents of VBM is that what a firm measures and rewards will get done. Consequently, the compensation program must measure employees’ activities that contribute toward wealth creation and reward those efforts. In essence, the compensation plan should pay employees to think and act like owners. Both the level of compensation and its form and composition are discussed. Many observed problems and potential remedies are presented. One characteristic that firms must be aware of is the public's perception that executive compensation has become unacceptably excessive. A complete VsBM program must consider the political implications of its behavior as these perceptions can and do effect a firm's reputation and ultimately its wealth-creating ability. One mechanism for addressing these perceptions is to consider fairness criteria when designing a compensation program.Less
This chapter presents a fundamental component of every firm's internal control system, its compensation program. The basic paradigm espoused by the proponents of VBM is that what a firm measures and rewards will get done. Consequently, the compensation program must measure employees’ activities that contribute toward wealth creation and reward those efforts. In essence, the compensation plan should pay employees to think and act like owners. Both the level of compensation and its form and composition are discussed. Many observed problems and potential remedies are presented. One characteristic that firms must be aware of is the public's perception that executive compensation has become unacceptably excessive. A complete VsBM program must consider the political implications of its behavior as these perceptions can and do effect a firm's reputation and ultimately its wealth-creating ability. One mechanism for addressing these perceptions is to consider fairness criteria when designing a compensation program.
Robert W. Kolb
- Published in print:
- 2012
- Published Online:
- April 2015
- ISBN:
- 9780199829583
- eISBN:
- 9780190258498
- Item type:
- book
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:osobl/9780199829583.001.0001
- Subject:
- Business and Management, Corporate Governance and Accountability
The scholarly literature on executive compensation is vast. As such, this literature provides an unparalleled resource for studying the interaction between the setting of incentives (or the attempted ...
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The scholarly literature on executive compensation is vast. As such, this literature provides an unparalleled resource for studying the interaction between the setting of incentives (or the attempted setting of incentives) and the behavior that is actually adduced. From this literature, there are several reasons for believing that one can set incentives in executive compensation with a high rate of success in guiding CEO behavior, and one might expect CEO compensation to be a textbook example of the successful use of incentives. Also, as executive compensation has been studied intensively in the academic literature, we might also expect the success of incentive compensation to be well-documented. Historically, however, this has been very far from the case. This book studies the performance of incentives in executive compensation across many dimensions of CEO performance. The book begins with an overview of incentives and unintended consequences. Then it focuses on the theory of incentives as applied to compensation generally, and as applied to executive compensation particularly. Subsequent chapters explore different facets of executive compensation and assess the evidence on how well incentive compensation performs in each arena. The book concludes with a final chapter that provides an overall assessment of the value of incentives in guiding executive behavior. In it, the book argues that incentive compensation for executives is so problematic and so prone to error that the social value of giving huge incentive compensation packages is likely to be negative on balance. In focusing on incentives, the book provides a much sought-after resource, for while there are a number of books on executive compensation, none focuses specifically on incentives.Less
The scholarly literature on executive compensation is vast. As such, this literature provides an unparalleled resource for studying the interaction between the setting of incentives (or the attempted setting of incentives) and the behavior that is actually adduced. From this literature, there are several reasons for believing that one can set incentives in executive compensation with a high rate of success in guiding CEO behavior, and one might expect CEO compensation to be a textbook example of the successful use of incentives. Also, as executive compensation has been studied intensively in the academic literature, we might also expect the success of incentive compensation to be well-documented. Historically, however, this has been very far from the case. This book studies the performance of incentives in executive compensation across many dimensions of CEO performance. The book begins with an overview of incentives and unintended consequences. Then it focuses on the theory of incentives as applied to compensation generally, and as applied to executive compensation particularly. Subsequent chapters explore different facets of executive compensation and assess the evidence on how well incentive compensation performs in each arena. The book concludes with a final chapter that provides an overall assessment of the value of incentives in guiding executive behavior. In it, the book argues that incentive compensation for executives is so problematic and so prone to error that the social value of giving huge incentive compensation packages is likely to be negative on balance. In focusing on incentives, the book provides a much sought-after resource, for while there are a number of books on executive compensation, none focuses specifically on incentives.
Daniel N. Shaviro
- Published in print:
- 2012
- Published Online:
- May 2012
- ISBN:
- 9780199698165
- eISBN:
- 9780191738630
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199698165.003.0007
- Subject:
- Economics and Finance, Financial Economics
Tax rules encouraging excessive debt, complex financial transactions, poorly designed incentive compensation for corporate managers, and highly leveraged homeownership all may have contributed to the ...
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Tax rules encouraging excessive debt, complex financial transactions, poorly designed incentive compensation for corporate managers, and highly leveraged homeownership all may have contributed to the financial crisis, but do not appear to have been among the primary causes. Even without a strong causal link, however, the pre-existing case for tax reform at all these margins arguably is strengthened by the 2008 financial crisis, which suggests that tax rules not only fell short of classic neutrality benchmarks but generally leaned in precisely the wrong direction.Less
Tax rules encouraging excessive debt, complex financial transactions, poorly designed incentive compensation for corporate managers, and highly leveraged homeownership all may have contributed to the financial crisis, but do not appear to have been among the primary causes. Even without a strong causal link, however, the pre-existing case for tax reform at all these margins arguably is strengthened by the 2008 financial crisis, which suggests that tax rules not only fell short of classic neutrality benchmarks but generally leaned in precisely the wrong direction.
Martin J. Conyon, Nuno Fernandes, Miguel A. Ferreira, Matos Pedro, and Kevin J. Murphy
- Published in print:
- 2013
- Published Online:
- May 2013
- ISBN:
- 9780199669806
- eISBN:
- 9780191749407
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199669806.003.0005
- Subject:
- Economics and Finance, Macro- and Monetary Economics
The chapter provides a comprehensive transatlantic comparison of pay spanning six years and covering approximately 1,500 US firms and 900 firms from nine European countries with mandated pay ...
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The chapter provides a comprehensive transatlantic comparison of pay spanning six years and covering approximately 1,500 US firms and 900 firms from nine European countries with mandated pay disclosures. The authors show that US CEOs are paid significantly more than their foreign counterparts after controlling for company size, industry, and other characteristics. Moreover, US executives receive a greater share of their compensation in the form of stock options, restricted shares, and performance-based bonuses. In the end, the authors present the evolution in the UK, France, Germany, and Italy.Less
The chapter provides a comprehensive transatlantic comparison of pay spanning six years and covering approximately 1,500 US firms and 900 firms from nine European countries with mandated pay disclosures. The authors show that US CEOs are paid significantly more than their foreign counterparts after controlling for company size, industry, and other characteristics. Moreover, US executives receive a greater share of their compensation in the form of stock options, restricted shares, and performance-based bonuses. In the end, the authors present the evolution in the UK, France, Germany, and Italy.
Eric W Orts
- Published in print:
- 2013
- Published Online:
- September 2013
- ISBN:
- 9780199670918
- eISBN:
- 9780191749599
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199670918.003.0008
- Subject:
- Business and Management, Organization Studies
This chapter provides two practical applications of the legal theory of the firm elucidated in the book. One controversial issue addressed is executive compensation in corporations, which many ...
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This chapter provides two practical applications of the legal theory of the firm elucidated in the book. One controversial issue addressed is executive compensation in corporations, which many observers believe has become disproportionate in some countries and within some firms. The chapter shows how some influential economic theories adopted simplistic “principal–-agent” prescriptions which contributed to imbalance and injustice in contemporary compensation practices (e.g. through the careless use of stock options). An institutional legal theory offers a corrective to this approach.A second controversial issue involves the political free-speech rights of corporations and other “business persons,” such as addressed in the controversial Citizens United case. The chapter argues that an institutional legal theory of the firm can deepen analysis and understanding on both sides of the debate. It also suggests possible directions for future compromise, such as mandatory disclosure requirements of the funding of political campaigns and other political activities of business firms.Less
This chapter provides two practical applications of the legal theory of the firm elucidated in the book. One controversial issue addressed is executive compensation in corporations, which many observers believe has become disproportionate in some countries and within some firms. The chapter shows how some influential economic theories adopted simplistic “principal–-agent” prescriptions which contributed to imbalance and injustice in contemporary compensation practices (e.g. through the careless use of stock options). An institutional legal theory offers a corrective to this approach.A second controversial issue involves the political free-speech rights of corporations and other “business persons,” such as addressed in the controversial Citizens United case. The chapter argues that an institutional legal theory of the firm can deepen analysis and understanding on both sides of the debate. It also suggests possible directions for future compromise, such as mandatory disclosure requirements of the funding of political campaigns and other political activities of business firms.
Robert W. Kolb
- Published in print:
- 2012
- Published Online:
- April 2015
- ISBN:
- 9780199829583
- eISBN:
- 9780190258498
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:osobl/9780199829583.003.0001
- Subject:
- Business and Management, Corporate Governance and Accountability
This chapter analyzes the general level of executive compensation and explains the main components of executive pay packages. It focuses on two approaches that address why executive pay is so high ...
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This chapter analyzes the general level of executive compensation and explains the main components of executive pay packages. It focuses on two approaches that address why executive pay is so high and distributed across so many vehicles. The “optimal contracting” or “incentive alignment” approach stresses that executive compensation must be structured to provide executives the right incentives to manage the firm in a way that maximizes its value. The other approach, “managerial power hypothesis”, asserts that executives capture the pay-setting process and essentially write their own excessive paychecks.Less
This chapter analyzes the general level of executive compensation and explains the main components of executive pay packages. It focuses on two approaches that address why executive pay is so high and distributed across so many vehicles. The “optimal contracting” or “incentive alignment” approach stresses that executive compensation must be structured to provide executives the right incentives to manage the firm in a way that maximizes its value. The other approach, “managerial power hypothesis”, asserts that executives capture the pay-setting process and essentially write their own excessive paychecks.
Tito Boeri, Claudio Lucifora, and Kevin J. Murphy (eds)
- Published in print:
- 2013
- Published Online:
- May 2013
- ISBN:
- 9780199669806
- eISBN:
- 9780191749407
- Item type:
- book
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199669806.001.0001
- Subject:
- Economics and Finance, Macro- and Monetary Economics
Part one: The book traces the evolution of executive compensation, its controversies and its resulting regulations, by comparing US and European CEOs. It shows that many features of current executive ...
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Part one: The book traces the evolution of executive compensation, its controversies and its resulting regulations, by comparing US and European CEOs. It shows that many features of current executive compensation practices reflect the often-unintended consequences of regulatory responses to perceived abuses in top-executive pay, often stemming from relatively isolated events or situations. Regulation always creates unintended (and usually costly) side effects and it is often inherently driven by politicians more interested in their political agendas rather than creating shareholder value. Improvements in executive compensation are more likely to emanate through stronger corporate governance, and not through direct government intervention. Part one: The compensation packages of a growing proportion of firms include pay schemes that are linked to employee or company performance, however little is known about the patterns of performance related pay both within and across countries. This study investigates the diffusion of incentive pay schemes on both sides of the Atlantic and finds a number of empirical regularities. Incentive pay is less common where the share of small firms is larger, or where product and labour markets are regulated. We show that government intervention in this area is not obvious and that extensive discussion with labour, management, and government decision-makers is important.Less
Part one: The book traces the evolution of executive compensation, its controversies and its resulting regulations, by comparing US and European CEOs. It shows that many features of current executive compensation practices reflect the often-unintended consequences of regulatory responses to perceived abuses in top-executive pay, often stemming from relatively isolated events or situations. Regulation always creates unintended (and usually costly) side effects and it is often inherently driven by politicians more interested in their political agendas rather than creating shareholder value. Improvements in executive compensation are more likely to emanate through stronger corporate governance, and not through direct government intervention. Part one: The compensation packages of a growing proportion of firms include pay schemes that are linked to employee or company performance, however little is known about the patterns of performance related pay both within and across countries. This study investigates the diffusion of incentive pay schemes on both sides of the Atlantic and finds a number of empirical regularities. Incentive pay is less common where the share of small firms is larger, or where product and labour markets are regulated. We show that government intervention in this area is not obvious and that extensive discussion with labour, management, and government decision-makers is important.
Robert W. Kolb
- Published in print:
- 2012
- Published Online:
- April 2015
- ISBN:
- 9780199829583
- eISBN:
- 9780190258498
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:osobl/9780199829583.003.0002
- Subject:
- Business and Management, Corporate Governance and Accountability
This chapter discusses the ways in which economists and public policymakers conceive the system of executive compensation. It assesses the performance of firms in setting incentives for executives ...
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This chapter discusses the ways in which economists and public policymakers conceive the system of executive compensation. It assesses the performance of firms in setting incentives for executives and how executives respond to those incentives. Incentives are powerful factors in stimulating human behavior and have become a tool self-consciously deployed in many aspects of contemporary life. However, problems develop when the incentives are too powerful or misdirected, leading to bad behavior or a variety of unfortunate results.Less
This chapter discusses the ways in which economists and public policymakers conceive the system of executive compensation. It assesses the performance of firms in setting incentives for executives and how executives respond to those incentives. Incentives are powerful factors in stimulating human behavior and have become a tool self-consciously deployed in many aspects of contemporary life. However, problems develop when the incentives are too powerful or misdirected, leading to bad behavior or a variety of unfortunate results.
Joseph E. Stiglitz
- Published in print:
- 2010
- Published Online:
- February 2010
- ISBN:
- 9780199578801
- eISBN:
- 9780191723285
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199578801.003.0002
- Subject:
- Economics and Finance, Macro- and Monetary Economics, Financial Economics
The global financial crisis is distinctive in its origins, its magnitude, and its consequences. This chapter examines the failures that led to the crisis and, in particular, the important role played ...
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The global financial crisis is distinctive in its origins, its magnitude, and its consequences. This chapter examines the failures that led to the crisis and, in particular, the important role played by information and incentives problems. On the basis of this diagnosis, the author provides recommendations on how to reform financial regulation to prevent future crises. The crisis provides an excellent case study in the economics of information. Stiglitz illustrates how the models—those used explicitly by or implicit in the mind of both regulators and market participants—ignored the imperfections and asymmetries of information. Since incentives mattered, distorted incentives at both the individual and organizational level led to distorted behavior. These distorted incentives included executive compensation systems in banks and conflict of interest in rating agencies. Additional problems were caused by the repeal of Glass‐Steagall, moral hazard, the use of complexity to reduce competition and increase profit margins, as well as moral hazard problems created by securitization.Less
The global financial crisis is distinctive in its origins, its magnitude, and its consequences. This chapter examines the failures that led to the crisis and, in particular, the important role played by information and incentives problems. On the basis of this diagnosis, the author provides recommendations on how to reform financial regulation to prevent future crises. The crisis provides an excellent case study in the economics of information. Stiglitz illustrates how the models—those used explicitly by or implicit in the mind of both regulators and market participants—ignored the imperfections and asymmetries of information. Since incentives mattered, distorted incentives at both the individual and organizational level led to distorted behavior. These distorted incentives included executive compensation systems in banks and conflict of interest in rating agencies. Additional problems were caused by the repeal of Glass‐Steagall, moral hazard, the use of complexity to reduce competition and increase profit margins, as well as moral hazard problems created by securitization.
Martin J. Conyon, Nuno Fernandes, Miguel A. Ferreira, Matos Pedro, and Kevin J. Murphy
- Published in print:
- 2013
- Published Online:
- May 2013
- ISBN:
- 9780199669806
- eISBN:
- 9780191749407
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199669806.003.0004
- Subject:
- Economics and Finance, Macro- and Monetary Economics
The chapter sketches the evolution of pay practices in the United States, focusing particular attention on policies enacted to regulate CEO pay, and the unintended (and usually counterproductive) ...
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The chapter sketches the evolution of pay practices in the United States, focusing particular attention on policies enacted to regulate CEO pay, and the unintended (and usually counterproductive) consequences of those policies. The authors argue that many of the trends in compensation levels and practices can be traced directly to government responses to actual or perceived abuses in pay, often stemming from isolated events involving a single company or industry.Less
The chapter sketches the evolution of pay practices in the United States, focusing particular attention on policies enacted to regulate CEO pay, and the unintended (and usually counterproductive) consequences of those policies. The authors argue that many of the trends in compensation levels and practices can be traced directly to government responses to actual or perceived abuses in pay, often stemming from isolated events involving a single company or industry.
Lars Oxelheim and Clas Wihlborg
- Published in print:
- 2008
- Published Online:
- May 2009
- ISBN:
- 9780195335743
- eISBN:
- 9780199868964
- Item type:
- book
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780195335743.001.0001
- Subject:
- Economics and Finance, Financial Economics
This book develops “Macroeconomic Uncertainty Strategy” (MUST) as a tool for coping with the impact of macroeconomic fluctuations on risk management, performance assessment, and strategies for value ...
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This book develops “Macroeconomic Uncertainty Strategy” (MUST) as a tool for coping with the impact of macroeconomic fluctuations on risk management, performance assessment, and strategies for value enhancement. The essential elements of a corporate strategy for managing uncertainty in the macroeconomic environment includes setting corporate objectives for risk management, measuring risk, choosing operational and financial instruments for risk management, filtering out macroeconomic influences on performance, and developing compensation schemes that enhance shareholder value when macroeconomic fluctuations bias performance measures. The information obtained through conventional accounting systems become seriously misleading in response to macroeconomic fluctuations with the consequence that alternative ways to obtain relevant information must be considered. Conventional measures of exchange rate, interest rate, and inflation risk are similarly misleading with the consequence that a comprehensive view of the macroeconomic impact on the firm—recognizing the interdependence between macroeconomic variables—must be developed. Most of all, strategies to deal with macroeconomic fluctuations should be considered on a strategic level in the firm in order to establish shareholder wealth maximization as the objective of risk management and reward systems. Shareholder wealth maximization also requires that external stakeholders obtain information that allows them to evaluate the competitiveness of the firm without obfuscation by macroeconomic events.Less
This book develops “Macroeconomic Uncertainty Strategy” (MUST) as a tool for coping with the impact of macroeconomic fluctuations on risk management, performance assessment, and strategies for value enhancement. The essential elements of a corporate strategy for managing uncertainty in the macroeconomic environment includes setting corporate objectives for risk management, measuring risk, choosing operational and financial instruments for risk management, filtering out macroeconomic influences on performance, and developing compensation schemes that enhance shareholder value when macroeconomic fluctuations bias performance measures. The information obtained through conventional accounting systems become seriously misleading in response to macroeconomic fluctuations with the consequence that alternative ways to obtain relevant information must be considered. Conventional measures of exchange rate, interest rate, and inflation risk are similarly misleading with the consequence that a comprehensive view of the macroeconomic impact on the firm—recognizing the interdependence between macroeconomic variables—must be developed. Most of all, strategies to deal with macroeconomic fluctuations should be considered on a strategic level in the firm in order to establish shareholder wealth maximization as the objective of risk management and reward systems. Shareholder wealth maximization also requires that external stakeholders obtain information that allows them to evaluate the competitiveness of the firm without obfuscation by macroeconomic events.
Bala N. Balasubramanian, Samir K. Barua, and D. Karthik
- Published in print:
- 2016
- Published Online:
- December 2016
- ISBN:
- 9780199469321
- eISBN:
- 9780199087532
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199469321.003.0011
- Subject:
- Business and Management, Corporate Governance and Accountability
One of the key issues raised by Occupy Wall Street movement that began in 2011 pertains to the morality and the propriety of compensation levels of top executives in the recent past that were ...
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One of the key issues raised by Occupy Wall Street movement that began in 2011 pertains to the morality and the propriety of compensation levels of top executives in the recent past that were perceived to be unconscionably high and disproportionate to performance of companies. CEO compensation trends in India, while not universally extortionist, are still perceived to be out of tune with the general pay levels in the country and, arguably, to be unrelated to their companies’ performance. This study empirically explores the relationship between CEO compensation and the various attributes of a company such as size, performance, type of ownership, and board structure and processes. The data analysed pertains to the largest quoted companies that were included in the NSE 100 index set, over a six-year period between 2007 and 2012. The conclusions provide interesting insights of particular relevance not only to India but also to other countries with a predominance of concentrated share ownership and promoter control of companies.Less
One of the key issues raised by Occupy Wall Street movement that began in 2011 pertains to the morality and the propriety of compensation levels of top executives in the recent past that were perceived to be unconscionably high and disproportionate to performance of companies. CEO compensation trends in India, while not universally extortionist, are still perceived to be out of tune with the general pay levels in the country and, arguably, to be unrelated to their companies’ performance. This study empirically explores the relationship between CEO compensation and the various attributes of a company such as size, performance, type of ownership, and board structure and processes. The data analysed pertains to the largest quoted companies that were included in the NSE 100 index set, over a six-year period between 2007 and 2012. The conclusions provide interesting insights of particular relevance not only to India but also to other countries with a predominance of concentrated share ownership and promoter control of companies.
Martin J. Conyon, Nuno Fernandes, Miguel A. Ferreira, Matos Pedro, and Kevin J. Murphy
- Published in print:
- 2013
- Published Online:
- May 2013
- ISBN:
- 9780199669806
- eISBN:
- 9780191749407
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780199669806.003.0003
- Subject:
- Economics and Finance, Macro- and Monetary Economics
The chapter describes how the financial crisis has created a public uproar over top-executive pay packages and has led to calls for reform of executive pay in Europe and in the United States. The ...
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The chapter describes how the financial crisis has created a public uproar over top-executive pay packages and has led to calls for reform of executive pay in Europe and in the United States. The authors argue that government should resist temptations to regulate pay schemes, since regulation always creates unintended and costly side effects. Improvements in executive compensation can only emanate from a stronger corporate governance, and not through government intervention (even when well intended).Less
The chapter describes how the financial crisis has created a public uproar over top-executive pay packages and has led to calls for reform of executive pay in Europe and in the United States. The authors argue that government should resist temptations to regulate pay schemes, since regulation always creates unintended and costly side effects. Improvements in executive compensation can only emanate from a stronger corporate governance, and not through government intervention (even when well intended).
Robert W. Kolb
- Published in print:
- 2012
- Published Online:
- April 2015
- ISBN:
- 9780199829583
- eISBN:
- 9780190258498
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:osobl/9780199829583.003.0009
- Subject:
- Business and Management, Corporate Governance and Accountability
This chapter summarizes the weight of evidence on incentive compensation and shows how it can be improved through the strengthening of corporate governance. It characterizes a system of beneficial ...
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This chapter summarizes the weight of evidence on incentive compensation and shows how it can be improved through the strengthening of corporate governance. It characterizes a system of beneficial incentives and suggests improvements that can occur within the general framework of corporate governance and regulation. Whether or not the desirable outcome can be achieved, executive pay will still be based on incentive compensation. No matter how refined and improved corporate governance and governmental regulation becomes, the system of executive compensation will still suffer from the plunders of unscrupulous CEOs for whom “too much is not enough”.Less
This chapter summarizes the weight of evidence on incentive compensation and shows how it can be improved through the strengthening of corporate governance. It characterizes a system of beneficial incentives and suggests improvements that can occur within the general framework of corporate governance and regulation. Whether or not the desirable outcome can be achieved, executive pay will still be based on incentive compensation. No matter how refined and improved corporate governance and governmental regulation becomes, the system of executive compensation will still suffer from the plunders of unscrupulous CEOs for whom “too much is not enough”.
Graeme Guthrie
- Published in print:
- 2017
- Published Online:
- May 2017
- ISBN:
- 9780190641184
- eISBN:
- 9780190641214
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780190641184.003.0005
- Subject:
- Economics and Finance, Financial Economics
One of a board’s most important roles is setting executive pay. This chapter introduces the various components of executive compensation schemes and analyzes the pay-setting process using the ...
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One of a board’s most important roles is setting executive pay. This chapter introduces the various components of executive compensation schemes and analyzes the pay-setting process using the efficient contracting hypothesis. Executives and the board bargain over how sensitive pay will be to the firm’s performance, weighing the incentives generated by performance-based pay against the misallocation of risk that results when risk that could be diversified away by shareholders is transferred onto a firm’s executives. Executives and the board also negotiate over the level of pay, leading to outcomes that reflect the strength or weakness of the board. This chapter uses the story of Michael Eisner’s compensation during the 21 years he was Disney’s CEO to explain the efficient contracting hypothesis and to illustrate the problems that can arise when executives’ compensation is closely tied to a firm’s performance.Less
One of a board’s most important roles is setting executive pay. This chapter introduces the various components of executive compensation schemes and analyzes the pay-setting process using the efficient contracting hypothesis. Executives and the board bargain over how sensitive pay will be to the firm’s performance, weighing the incentives generated by performance-based pay against the misallocation of risk that results when risk that could be diversified away by shareholders is transferred onto a firm’s executives. Executives and the board also negotiate over the level of pay, leading to outcomes that reflect the strength or weakness of the board. This chapter uses the story of Michael Eisner’s compensation during the 21 years he was Disney’s CEO to explain the efficient contracting hypothesis and to illustrate the problems that can arise when executives’ compensation is closely tied to a firm’s performance.
Graeme Guthrie
- Published in print:
- 2017
- Published Online:
- May 2017
- ISBN:
- 9780190641184
- eISBN:
- 9780190641214
- Item type:
- chapter
- Publisher:
- Oxford University Press
- DOI:
- 10.1093/acprof:oso/9780190641184.003.0006
- Subject:
- Economics and Finance, Financial Economics
This chapter uses pay in the home construction industry during the recent housing boom and bust to illustrate the second of the two competing theories that economists use to understand executive ...
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This chapter uses pay in the home construction industry during the recent housing boom and bust to illustrate the second of the two competing theories that economists use to understand executive compensation: the managerial power hypothesis. According to this theory, boards at some firms have such weak bargaining positions that the only constraint on executive pay is the prospect of shareholder outrage. The theory’s central prediction is that weak boards and strong CEOs combine to find ways to pay executives that reduce the threat of shareholder outrage. This chapter develops this prediction and demonstrates its ability to explain observed pay practices that have the effect of camouflaging high pay levels.Less
This chapter uses pay in the home construction industry during the recent housing boom and bust to illustrate the second of the two competing theories that economists use to understand executive compensation: the managerial power hypothesis. According to this theory, boards at some firms have such weak bargaining positions that the only constraint on executive pay is the prospect of shareholder outrage. The theory’s central prediction is that weak boards and strong CEOs combine to find ways to pay executives that reduce the threat of shareholder outrage. This chapter develops this prediction and demonstrates its ability to explain observed pay practices that have the effect of camouflaging high pay levels.
