We thank an anonymous referee, Ingolf Dittmann and Ernst Maug for valued input.
Is CEO Pay Really Inefficient? A Survey of New Optimal Contracting Theories
Article first published online: 5 MAY 2009
© 2009 The Authors Journal compilation © 2009 Blackwell Publishing Ltd
European Financial Management
Volume 15, Issue 3, pages 486–496, June 2009
How to Cite
Edmans, A. and Gabaix, X. (2009), Is CEO Pay Really Inefficient? A Survey of New Optimal Contracting Theories. European Financial Management, 15: 486–496. doi: 10.1111/j.1468-036X.2009.00500.x
- Issue published online: 26 MAY 2009
- Article first published online: 5 MAY 2009
- executive compensation;
- CEO incentives;
- optimal contracting
Bebchuk and Fried (2004) argue that executive compensation is set by CEOs themselves rather than boards on behalf of shareholders, since many features of observed pay packages may appear inconsistent with standard optimal contracting theories. However, it may be that simple models do not capture several complexities of real-life settings. This article surveys recent theories that extend traditional frameworks to incorporate these dimensions, and show that the above features can be fully consistent with efficiency. For example, optimal contracting theories can explain the recent rapid increase in pay, the low level of incentives and their negative scaling with firm size, pay-for-luck, the widespread use of options (as opposed to stock), severance pay and debt compensation, and the insensitivity of incentives to risk.