- October 2008
International Standard Serial Number (ISSN)
Electronic International Standard Serial Number (EISSN)
- The main economic problem behind executive compensation design is that firm owners need to align the incentives of the executives to their own interests -- typically to maximize firm value. To achieve this alignment, the compensation of the manager is usually made contingent on the performance of the firm. According to some recent studies, the cost of CEO compensation for firms may not be so economically significant. However, the economic consequences of not providing the right incentives appear to be potentially large. Even if the total pay of a CEO was independent from the performance of his firm, the manager still would have some incentives to exert effort if the threat of dismissal was high enough or career concerns were present. Recent regulation of corporate governance seems to have been aiding market-driven changes in internal control. However, it is also easy to find indications that some of the compensation regulation may impose unnecessary burdens and distortions on firms.