Research Handbooks in Corporate Law and Governance series
Edited by Randall S. Thomas and Jennifer G. Hill
Society has a perennial fascination with money. Horace, for example, counselled, “If possible, honestly, if not, somehow, make money.”1 Executive compensation became a key aspect of corporate governance debate during the 1990s, a period when the regulatory pendulum swung away from legislative intervention in favour of self-regulation. Pay for performance offered the prospect of a self-executing governance technique to align the interests of management with those of shareholders. Since that time, however, academic debate in the United States and elsewhere has raged on the question whether executive compensation is determined efficiently by disinterested corporate directors, reflecting the existing corporate governance system (the optimal contracting model) or skewed due to a power imbalance between managers and shareholders (the managerial power model). Recent corporate scandals and crises, including the global financial crisis, have again brought executive compensation to center stage and onto the regulatory agenda. Indeed, according to the UK Turner Review, the global financial crisis challenged fundamental assumptions about the market’s efficiency, rationality and ability to self-regulate, which had previously underpinned financial law.2 These developments have focused public and academic attention on many facets of executive compensation. In this introduction, we highlight a few of the key debates in the field, and then discuss how the contributors to this Handbook have addressed them. OPTIMAL CONTRACTING VS. MANAGERIAL POWER There are two competing schools of thought that dominate academic discussions about US executive compensation practices today: managerial power and optimal contracting theory. Managerial power theorists argue that American CEOs dominate friendly...