NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Executive Compensation: Six Questions that Need Answering

John M. Abowd, David S. Kaplan

NBER Working Paper No. 7124
Issued in May 1999
NBER Program(s):   LS

In this article, we focus on how recent research advances can be used to address the following six questions: (1) How much does executive compensation cost the firm? (2) How much is executive compensation worth to the recipient? (3) How well does executive compensation work? (4) What are the effects of executive compensation? (5) How much executive compensation is enough? (6) Could executive compensation be improved? We stress the formal link between executive pay and performance that is provided by stock options and equivalent forms of long term compensation. We compare executive compensation in 12 OECD countries for the period from 1984-1996. There are good reasons why the answers to the first two questions are different. Executive compensation research should be very careful to distinguish the concepts of employer cost and the value to the executive. Agency theory remains the only viable candidate for answering the question about how executive compensation works but the empirical research to date cannot explain very much about the structure of the optimal contract. For this reason, it is also hard to answer the questions about the effects of executive compensation and the adequacy of the amounts of executive compensation, although it is clear that companies can provide both too little and too much contingent compensation, in the context of agency theory. We suggest two fertile areas for research regarding the improvement of executive compensation.

download in pdf format
   (224 K)

email paper

This paper is available as PDF (224 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w7124

Published: Journal of Economic Perspectives, Vol. 13, no. 4 (Fall 1999): 145-168.

Users who downloaded this paper also downloaded these:
Frydman and Jenter w16585 CEO Compensation
Kaplan and Rauh w13270 Wall Street and Main Street: What Contributes to the Rise in the Highest Incomes?
Hermalin and Weisbach w8161 Boards of Directors as an Endogenously Determined Institution: A Survey of the Economic Literature
Aggarwal and Samwick w6634 The Other Side of the Tradeoff: The Impact of Risk on Executive Compensation
Clementi and Cooley w15426 Executive Compensation: Facts
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us