publication . Article . Other literature type . 1994

Executive Compensation and Principal-Agent Theory

John Garen;
Open Access
  • Published: 01 Dec 1994 Journal: Journal of Political Economy, volume 102, pages 1,175-1,199 (issn: 0022-3808, eissn: 1537-534X, Copyright policy)
  • Publisher: University of Chicago Press
Abstract
The empirical literature on executive compensation generally fails to specify a model of executive pay on which to base hypotheses regarding its determinants. In contrast, this paper analyzes a simple principal-agent model to determine how well it explains variations in CEO incentive pay and salaries. Many findings are consistent with the basic intuition of principle-agent models that compensation is structured to trade off incentives with insurance. However, statistical significance for some of the effects is weak, although the magnitudes are large. Nevertheless, it seems clear that principle-agent considerations play a role in setting executive compensation. C...
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Subjects
free text keywords: Actuarial science, Incentive, Intuition, Executive compensation, Economics, Principal–agent problem, Empirical literature
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