This paper summarizes the empirical and theoretical research on executive compensation and provides a comprehensive and up-to-date description of pay practices (and trends in pay practices) for chief executive officers (CEOs). Topics discussed include the level and structure of CEO pay (including detailed analyses of annual bonus plans, executive stock options, and option valuation), international pay differences, the pay-setting process, the relation between CEO pay and firm performance (“pay-performance sensitivities”), the relation between sensitivities and subsequent firm performance, relative performance evaluation, executive turnover, and the politics of CEO pay.

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We document that ownership by officers and directors of publicly-traded firms is on average higher today than earlier in the century. Managerial ownership rises from 13 percent for the universe of exchange-listed corporations in 1935, the earliest year for which such data exist, to 21 percent in 1995. We examine in detail the robustness of the increase and explore hypotheses to explain it. Higher managerial ownership has not substituted for alternative corporate governance mechanisms. Lower volatility and greater hedging opportunities associated with the development of financial markets appear to be important factors explaining the

The valuation effect of diversification is examined for large samples of firms in

This paper studies the determinants of executive turnover and firm valuation as a function of ownership and control structure in Italy, a country that features low legal protection for investors, firms with controlling shareholders and pyramidal groups. The results show that firms where the largest shareholders act as top executives, have a firm lock on control and own less than 50 percent of the firm's cash-flow rights exhibit poor governance, as measured by a lower sensitivity of turnover to performance and a lower Q ratio. JEL classification: G34, J63, L14 Keywords: Management turnover, corporate governance, pyramidal groups Author's address: Institute of Finance and Accounting, London Business School, Regent's Park, London NW1 4SA, United Kingdom. E-mail: pvolpin@london.edu. Acknowledgements: Ithank an anonymous referee, Julian Franks, Rafael La Porta, Marco Pagano, Henri Servaes, Andrei Shleifer, and participants at seminars at Harvard University, London Business School and London School of Economics for helpful comments. I also thank Richard Frost and Samanta Padalino for editing suggestions. I acknowledge support from the National Science Foundation Graduate Fellowship program and the JP Morgan Chase Research Fellowship at London Business School. 1 1.

The research for this project was funded from a donation from the Peter Moores Foundation to the Said Business School. We are very grateful to Esra Erdem for excellent research assistance on this and related projects and to Marco Becht, Vicenc This paper examines the relation between financial, corporate and legal systems, and economic performance in different countries. It reviews international comparisons that undertake detailed analyses of individual, developed countries and studies that use large, cross-country data banks, including developing countries. While the former do not provide evidence of a clear relation between different types of systems and economic performance, the latter report a strong association of financial development with economic growth. A recent theoretical literature offers a way of reconciling these two sets of studies. It points to a relation between financial / corporate systems and types of activity with some systems favouring high risk, short-term investments and others promoting long-term, relatively low risk investments. These theories also suggest that systems may be related to stages of economic development. The paper summarizes a first

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Japan’s prolonged economic problems are due to more than faulty macro-economic policies. We do not deny the importance of bungled macro-economic policy, but argue that deeper maladies in Japanese corporate governance made that country increasingly vulnerable to such problems. We argue that Japan’s main bank and financial keiretsu systems left corporate governance largely in the hands of creditors rather than shareholders. Thus, Japanese governance practices did not assign effective control rights to residual claimants. This, we argue, led to a widespread misallocation of capital that mired Japan in excess capacity and liquidity problems. 1.

A common view is that there is little correlation between �rm performance and CEO pay. Using a new �fteen-year panel data set of CEOs in the largest, publicly traded U. S. companies, we document a strong relationship between �rm performance and CEO compensation. This relationship is generated almost entirely by changes in the value of CEO holdings of stock and stock options. In addition, we show that both the level of CEO compensation and the sensitivity of compensation to �rm performance have risen dramatically since 1980, largely because of increases in stock option grants. I.

We examine how different economies would design an optimal corporate governance system structured from three of the main mechanisms of corporate governance (managerial ownership, monitoring by banks, and disciplining by the takeover market). We allow for interactions among the mechanisms. The first set of results characterizes the combination of governance mechanisms that can appear in any optimally designed structure: 1) when monitored debt appears in an optimal system it is accompanied by concentrated ownership, and 2) when takeovers appear in an optimal system they are accompanied by diffuse ownership. We show that out of the numerous governance structures that could arise from combinations of the governance mechanisms, only three are candidates for an optimal system. These three endogenously derived governance structures match the prevalent systems (family based, bank based and market based) in the world. The optimal system for a given economy is characterized as a function of the degrees of development of its financial institutions and markets. Our analysis yields several testable implications. 1