Renjie Bao, Jan De Loecker, Jan Eeckhout, 17 May 2022

Since the 1980s, the pay of superstar workers has increased sharply, closely linked to the performance of the superstar firms that hire them. This column examines the contribution of monopoly power to manager pay. As firms grow in size, the contribution of the manager to the value of a firm increases, and firms are willing to bid higher to poach the best manager. Top managers are hired disproportionately by firms with market power in their sectors, and they get rewarded for it because better managers help increase the rents from market power.

Alex Edmans, Tom Gosling, Dirk Jenter, 15 July 2021

How CEO pay is set has been studied extensively, but most theoretical models do not capture whether real-world CEOs care about, for example, their reputation, fairness, or being appreciated by directors and investors. This column explores this using a survey of over 200 non-executive directors of FTSE All-Share companies and over 150 institutional investors in UK equities. While financial incentives are relevant to motivating CEOs, both CEOs and investors view a CEO’s intrinsic motivation and personal reputation as most important. Fairness matters – CEOs believe it is fair to be recognised for a job well done.

Pierre Chaigneau, Alex Edmans, Daniel Gottlieb, 04 May 2021

Executive pay is increasingly based on performance measures other than stock price – from financial metrics such as earnings and sales, to sustainability metrics such as emissions and safety. The use of performance-based vesting may seem like common sense, but it is often introduced in an ad hoc manner that does not allow for rigorous analysis or accountability. This column questions whether and under what conditions performance-based vesting is appropriate, and provides a framework for understanding how to incorporate performance conditions into CEO contracts.

Matthew Bloomfield, Catarina Marvão, Giancarlo Spagnolo, 09 October 2020

Theory suggests that the use of relative performance evaluation in managerial compensation should be widespread, but the evidence shows that this is not the case. This column argues that the potential for executives to seek to improve their relative standing by employing costly sabotage – for example, in the form of overly aggressive product market strategies – is an important deterrent to firms' use of relative performance evaluation. Explicit collusion mitigates this possibility, thereby facilitating more efficient risk-sharing between shareholders and executives.

Alex Edmans, 23 September 2016

During political campaigns, candidates often set their sights on CEO compensation as a target for potential regulation. This column considers the various arguments for regulating CEO pay and questions whether it is a legitimate target for political intervention. Some arguments for regulation are shown to be erroneous, and some previous interventions are shown to have failed. While regulation can address the symptoms, only independent boards and large shareholders can solve the underlying problems.

Brian Bell, John Van Reenen, 05 August 2016

Lacklustre growth seems to be the new normal almost everywhere in the world except for one area – CEO pay. This column uses data on UK publicly listed firms to examine whether weak governance leads to pay rises for CEOs that are not justified by performance. CEO pay asymmetry – pay responding more to increases in firm performance than to decreases – appears to occur mainly in firms with a low share of institutional owners able to exert external control. CEOs at such firms are also more likely to be paid for ‘luck’, with pay rises rewarding random positive shocks unrelated to performance.

Dalia Marin, 23 June 2016

Income inequality is less severe in Germany than in the US. Part of this is due to CEO pay in the US growing faster than in Germany. This column offers some novel explanations for these observations. From the mid-1990s, Germany began offshoring managerial tasks to Eastern Europe, reducing demand for German managers. In addition Germany offshored skill-intensive jobs to Eastern Europe, reducing the skill premium.

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