Executive compensation-where have you been, and where are you going?

Abstract

Executive compensation is an extensively researched and highly complex topic. This paper attempts to shed some light on the vast literature encompassing this topic. First, I provide background on the major works in executive compensation and agency theory over the last 80 years. Subsequently, I describe the more recent debate between proponents of the managerial power hypothesis and holders of the optimal contracting viewpoint. This discussion includes theoretical and empirical research supporting each side of the debate. I then transition into a more specific discussion of the inherent complexities of executive compensation and of the most recent research on modeling an optimal CEO contract. I highlight several unanswered questions and briefly discuss areas for future research.