Pay for Short-Term Performance: Executive Compensation in Speculative Markets

We argue that the root cause behind the recent corporate scandals associated with CEO pay is the technology bubble of the latter half of the 1990s. Far from rejecting the optimal incentive contracting theory of executive compensation, the recent evidence on executive pay can be reconciled with classical agency theory once one expands the framework to allow for speculative stock markets. ∗ We would like to thank Lucian Bebchuk, Jeffrey Gordon and Bengt Holmstrom for helpful comments. Scheinkman is grateful to the National Science Foundation grant SES0350770 for financial support.