Executive Compensation: A Modern Primer

T is considerable debate on executive compensation in both the public arena and academia. This debate spans several important topics in economics, such as contract theory, corporate finance, corporate governance, labor economics, and income inequality. One side is the “rent extraction” view, which claims that current compensation practices sharply contrast the predictions of traditional agency models. Thus, contracts are not chosen by boards to maximize shareholder value, but instead by the executives themselves to maximize their own rents. This perspective, espoused most prominently by Bebchuk and Fried (2004), has been taken very seriously by both scholars and policymakers, and led to major regulatory changes. In the United States, the Securities and Exchange Commission (SEC) mandated increased disclosure of compensation in 2006, and say-on-pay legislation was passed Executive Compensation: A Modern Primer†