Managerial Compensation: Agency Solution or Problem?

Abstract

This study investigates whether remuneration contracting provides sufficient managerial incentives to create shareholder value. We contrast the arguments that remuneration contracts effectively reduce agency costs to the idea that the remuneration contracting process enables managers to skim corporate profits. From a structured survey of the literature, serious doubts emerge on the effectiveness of executive pay. While executive remuneration seems to be efficient in many cases, research also provides ample evidence of managerial self-dealing, abuse of managerial power and various forms of hidden compensation. The question is whether or not these cases reflect a systematic problem in corporate governance. This study offers insights to policy makers and promotes the further development of governance standards with respect to better disclosure of executive pay, the introduction of longer vesting periods for stock options, the reduction in managerial rent extraction and the better alignment of executive remuneration with shareholder value creation.