Managerial Compensation

This chapter surveys the recent literature on managerial compensation, focusing on the main issues that spurred intense debate in the popular press, academia, and from regulatory agencies. In particular, the literature review discusses whether the high levels of executive compensation are justifiable, and whether executive compensation schemes induce unethical behavior by executives. While most of the empirical evidence supports the view that the high levels of executive compensation are excessive and unethical, an emerging stream of literature provides rational explanations for the observed levels of executive pay. Ample evidence also shows that some compensation packages induce executives to manipulate their pay. This chapter also summarizes a limited, but growing, literature linking managerial compensation to corporate social responsibility. This literature suggests that the structure of managerial compensation matters to corporate social performance.