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.

This paper provides an overview of the main theoretical elements and empirical underpinnings of a “managerial power ” approach to executive compensation. The managerial power approach recognizes that boards of publicly traded companies with dispersed ownership do not bargain at arms ’ length with managers, and that managers are able to influence their own pay arrangements. It thus views executive compensation not only as an instrument for addressing the agency problem between managers and shareholders, but also as part of the problem itself. We show that the managerial power approach can help explain many features of the executive compensation landscape, including ones that researchers have long viewed as puzzling. We explain that managerial influence produces efficiency costs because managers ’ seeking and camouflaging of rents produces

This paper studies how firms tie CEO compensation to firms' stock market performance. I demonstrate that in theory and in practice there is a tradeo# between giving CEOs incentives and forcing them to hold an un-diversified position in the firm. Unlike the results of the existing literature, market risk is not necessarily a cost of providing incentives. The cost of giving incentives is the potential loss of diversification for the CEO. As a result, CEO incentive decreases with firm-specific risk, but may not decrease with market risk. In performing the empirical tests, I also incorporate the recent critique by Prendergast (2000), which argues that the relation between risk and incentive level is unreliably estimated when we fail to consider the effect of risk on the benefit of giving incentives. I study both sides of the incentive-diversification tradeoff simultaneously. I am able to show that after controlling for the other side of the tradeoff, incentive increases with the CEOs' ability to affect firm value, and decreases with the firm-specific risk level of the firm.

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This paper studies the effect of changes in foreign competition on the incentives faced by U.S. managers through wage structures, promotion profiles and job turnover. We use a panel of executives and measure foreign competition as import penetration. Using tariffs and exchange rates as instrumental variables, we estimate the causal effect of globalization on the labor market outcomes of these workers. We find that higher foreign competition leads to more incentive provision in a variety of ways. (i) It increases the sensitivity of pay to performance, (ii) it raises the return to a promotion and increases pay inequality among the top executives of the firm, with CEOs typically experiencing wage increases while lower rank executives see their wages fall, and (iii) Higher competition is associated with a higher probability of leaving the firm. Finally we show (iv) that higher foreign competition is also associated with a higher demand for talent at the top of the firm. These results indicate that increased foreign competition can explain some of the recent trends in compensation structures.

ibrant public securities markets rely on complex systems of supporting institutions that promote the governance of publicly traded companies. Corporate governance structures serve: 1) to ensure that minority shareholders receive reliable

This paper presents the ¢rst model where entry deterrence takes place through ¢nancial rather than product-market channels. In existing models, a ¢rm’s choice of ¢nancial instruments deters entry by a¡ecting product market behavior; here entry deterrence occurs by a¡ecting the credit market behavior of investors towards entrant ¢rms.We ¢nd that to deter entry, the claims held on incumbent ¢rms should be su⁄ciently risky, that is, equity. This contrasts with the standard Brander and Lewis (1986) result that debt deters entry.This e¡ect is more marked the less competitive the credit market isFso more credit market competition spurs more product market competition. The di⁄culties inherent in acquiring external ¢nance in the United States in the nineteenth century provide an explanation for the basis of the fortunes of certain American entrepreneurs and suggest at least one reason why the economy was characterized by increasing concentration in the growth sectors.

I show that as long as the stock market has perfect foresight, profits are distributed as dividends, and incentives are paid more than once or are deferred, stock-related compensation packages are strong incentives for managers to support tacit collusive agreements in repeated oligopolies. The stock market anticipates the losses from punishment phases and discounts them on stock prices, reducing managers ’ short-run gains from any deviation. When deferred, stock-related incentives may remove all managers ’ shortrun gains from deviation, making collusion supportable at any discount factor. The results hold with managerial contracts of any length.

A risk-averse manager’s overconfidence makes him less conservative. As a result, it is cheaper for firms to motivate him to pursue valuable risky projects. When compensation endogenously adjusts to reflect outside opportunities, moderate levels of overconfidence lead firms to offer the manager flatter compensation contracts that make him better off. Overconfident managers are also more attractive to firms than their rational counterparts because overconfidence commits them to exert effort to learn about projects. Still, too much overconfidence is detrimental to the manager since it leads him to accept highly convex compensation contracts that expose him to excessive risk. AVAST EXPERIMENTAL LITERATURE finds that individuals are usually overconfident in that they believe their knowledge to be more precise than it actually is. The incidence of overconfidence is likely to be even greater among CEOs than among individuals at large; for example, Goel and Thakor (2008) show that overconfident individuals are more likely to win the intrafirm tournaments that lead to the rank of CEO. Since overconfidence directly influences decision-making, it is logical to investigate the effects that overconfident managers have on corporate policies and firm value. How does overconfidence affect the investment decisions that managers make on behalf of shareholders? How do compensation contracts optimally adjust to these effects? Do firms benefit from managerial overconfidence? Can overconfidence ever benefit the biased

paper represents a major extension of a section in Chapter 2 of my Ph.D. dissertation submitted to the University of California at Berkeley, where a two-asset equilibrium was developed. I am very grateful to Navneet Arora