Edited by Claire A. Hill and Brett H. McDonnell
Chapter 13: The Law and Economics of Executive Compensation: Theory and Evidence
David I. Walker 1. INTRODUCTION It is difficult to imagine a corporate law topic that has generated as much consternation, or as much academic research, over the last 20 years as public company executive compensation. In a seminal article on executive pay written in the late 1990s, Kevin Murphy noted that the academic research on the topic ‘had exploded’ (Murphy 1999), but surely the journal pages devoted to the topic in the 1990s are dwarfed by those produced since. The enterprise was and is highly interdisciplinary, with important contributions emanating from law, economics, corporate finance, and accounting, among other fields. This continuing academic interest is not surprising given the level and salience of executive pay and ongoing debate concerning the extent to which pay practices are consonant with corporate or shareholder interests. This chapter is intended to provide an overview of the theory and evidence regarding public company executive compensation. It is not comprehensive in either the choice of topics or the coverage of those topics, but is meant to provide the reader with an entryway into the literature on a select group of topics. Priority has been afforded to the most central issues in executive pay, to issues that implicate law more or less directly, and to issues that have been the primary focus of research in the last decade. The chapter is organized as follows. The next section briefly outlines three broad theoretical perspectives on the pay-setting process and the objectives of compensation: the optimal contracting theory, the...
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