"Introduction" [2012] ELECD 598; in Thomas, S. Randall; Hill, G. Jennifer (eds), "Research Handbook on Executive Pay" (Edward Elgar Publishing, 2012)

Book Title: Research Handbook on Executive Pay

Editor(s): Thomas, S. Randall; Hill, G. Jennifer

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9781849803960

Section Title: Introduction

Number of pages: 8

Extract:

Introduction


Society has a perennial fascination with money. Horace, for example, counselled, "If
possible, honestly, if not, somehow, make money."1 Executive compensation became a
key aspect of corporate governance debate during the 1990s, a period when the regulatory
pendulum swung away from legislative intervention in favour of self-regulation. Pay for
performance offered the prospect of a self-executing governance technique to align the
interests of management with those of shareholders. Since that time, however, academic
debate in the United States and elsewhere has raged on the question whether executive
compensation is determined efficiently by disinterested corporate directors, reflecting the
existing corporate governance system (the optimal contracting model) or skewed due to
a power imbalance between managers and shareholders (the managerial power model).
Recent corporate scandals and crises, including the global financial crisis, have again
brought executive compensation to center stage and onto the regulatory agenda. Indeed,
according to the UK Turner Review, the global financial crisis challenged fundamental
assumptions about the market's efficiency, rationality and ability to self-regulate, which
had previously underpinned financial law.2 These developments have focused public and
academic attention on many facets of executive compensation. In this introduction, we
highlight a few of the key debates in the field, and then discuss how the contributors to
this Handbook have addressed them.


OPTIMAL CONTRACTING VS. MANAGERIAL POWER

There are two competing schools of thought that dominate academic discussions about
US executive compensation practices today: managerial power and optimal contracting
theory. Managerial power theorists ...