This paper provides an overview of the main theoretical elements and empirical underpinnings of a “managerial power ” approach to executive compensation. The managerial power approach recognizes that boards of publicly traded companies with dispersed ownership do not bargain at arms ’ length with managers, and that managers are able to influence their own pay arrangements. It thus views executive compensation not only as an instrument for addressing the agency problem between managers and shareholders, but also as part of the problem itself. We show that the managerial power approach can help explain many features of the executive compensation landscape, including ones that researchers have long viewed as puzzling. We explain that managerial influence produces efficiency costs because managers ’ seeking and camouflaging of rents produces

The relationship between financial incentives and performance, long of interest to social scientists, has gained new relevance with the advent of web-based “crowd-sourcing ” models of production. Here we investigate the effect of compensation on performance in the context of two experiments, conducted on Amazon’s Mechanical Turk (AMT). We find that increased financial incentives increase the quantity, but not the quality, of work performed by participants, where the difference appears to be due to an “anchoring ” effect: workers who were paid more also perceived the value of their work to be greater, and thus were no more motivated than workers paid less. In contrast with compensation levels, we find the details of the compensation scheme do matter—specifically, a “quota ” system results in better work for less pay than an equivalent “piece rate ” system. Although counterintuitive, these findings are consistent with previous laboratory studies, and may have real-world analogs as well.

We report evidence on chief executive officer ~CEO! turnover during the 1971 to 1994 period. We find that the nature of CEO turnover activity has changed over time. The frequencies of forced CEO turnover and outside succession both increased. However, the relation between the likelihood of forced CEO turnover and firm performance did not change significantly from the beginning to the end of the period we examine, despite substantial changes in internal governance mechanisms. The evidence also indicates that changes in the intensity of the takeover market are not associated with changes in the sensitivity of CEO turnover to firm performance. STOCKHOLDERS RELY ON INTERNAL AND EXTERNAL monitoring mechanisms to help resolve agency problems that arise from the separation of ownership and control in modern corporations. Boards of directors and blockholders are important internal control mechanisms whereas the takeover market is a major source of external control. Both academicians and practitioners have

Due to institutional investors' increasing ownership and interest in corporate governance, we hypothesize that the presence of institutional investors is associated with certain executive compensation structures. We find a significantly negative relation between the level of compensation and the concentration of institutional ownership, suggesting that institutions serve a monitoring role in the shareholder-manager agency problem. We further find a significantly positive relation between the pay-for-performance sensitivity of executive compensation and both the level and concentration of institutional ownership. These results suggest that the institutions act as a complement rather than a substitute to incentive compensation in mitigating the agency problem.

This work is distributed as a Discussion Paper by the

This paper critically surveys the large and growing literature estimating the elasticity of taxable income with respect to marginal tax rates (ETI) using tax return data. First, we provide a theoretical framework showing under what assumptions this elasticity can be used as a sufficient statistic for efficiency and optimal tax analysis. We discuss what other parameters should be estimated when the elasticity is not a sufficient statistic. Second, we discuss conceptually the key issues that arise in the empirical estimation of the elasticity of taxable income using the example of the 1993 top individual income tax rate increase in the United States to illustrate those issues. Third, we provide a critical discussion of most of the taxable income elasticities studies to date, both in the United States and abroad, in light of the theoretical and empirical framework we laid out. Finally, we discuss avenues for future research.

T he most pronounced change in corporate compensation practices overthe past decade is the escalation and recent decline in executive andemployee stock options. In 1992, rms in the Standard & Poor’s 500 granted their employees options worth a total of $11 billion at the time of grant; by 2000, option grants in S&P 500 rms increased to $119 billion.1 In 2002, option grants in the S&P 500 fell to $71 billion, well below their peak, but still a six-fold increase from a decade earlier. Despite—or perhaps because of—their growing importance, employee stock options have become increasingly controversial. The main argument in favor of stock option plans is that they give executives a greater incentive to act in the interests of shareholders by providing a direct link between realized compensation and company stock price performance. In addi-tion, offering employee stock options in lieu of cash compensation allows compa-nies to attract highly motivated and entrepreneurial employees and also lets companies obtain employment services without (directly) expending cash. Options are typically structured so that only employees who remain with the rm can bene t from them, thus also providing retention incentives. Finally, stock options encour-age executive risk taking, which can mitigate problems with executive risk aversion. But the incentives provided by stock options have also been criticized. The recent accounting scandals at Enron, WorldCom, Global Crossing and other com-1 Option values are in 2002-constant dollars and are based on Compustat’s ExecuComp data; see Figure 1 below for calculation details. Data are not available for all S&P 500 rms; the total for S&P 500 rms is estimated as 500 times the average grant for S&P 500 rms with available data.

Many firms issue stock options to all employees. We consider three potential economic justifications for this practice: providing incentives to employees, inducing employees to sort, and helping firms retain employees. We gather data on firms ’ stock option grants to middle managers from three distinct sources, and use two methods to assess which theories appear to explain observed granting behavior. First, we directly calibrate models of incentives, sorting and retention, and ask whether observed magnitudes of option grants are consistent with each potential explanation. Second, we conduct a cross-sectional regression analysis of firms optiongranting choices. We reject an incentives-based explanation for broad-based stock option plans, and conclude that sorting and retention explanations appear consistent with the data.

Corporate governance in the United States changed dramatically throughout the 1980s and 1990s. Before 1980, corporate governance—meaning the mechanisms by which corporations and their managers are governed—was relatively inactive. Then, the 1980s ushered in a large wave of merger, takeover and restructuring activity. This activity was distinguished by its use of leverage and hostility. The use of leverage was so great that from 1984 to 1990, more than $500 billion of equity was retired on net, as corporations repurchased their own shares, borrowed to finance takeovers, and were taken private in leveraged buyouts. Corporate leverage increased substantially. Leveraged buyouts were extreme in this respect with debt levels typically exceeding 80 percent of total capital. The 1980s also saw the emergence of the hostile takeover and the corporate raider. Raiders like Carl Icahn and T. Boone Pickens became household names. Mitchell and Mulherin (1996) report that nearly half of all major U.S. corporations received a takeover offer in the 1980s. In addition, many firms that were not taken over restructured in response to hostile pressure to make themselves less attractive targets. In the 1990s, the pattern of corporate governance activity changed again. After a steep but brief drop in merger activity around 1990, takeovers rebounded to the levels of the 1980s. Leverage and hostility, however, declined substantially. At the same time, other corporate governance mechanisms began to play a larger role,

This paper examines how stock options affect the decision to repurchase shares. Firms announce repurchases when executives have large numbers of options outstanding and when employees have large numbers of options currently exercisable. Once the decision to repurchase is made, the amount repurchased is positively related to total options exercisable by all employees but independent of managerial options. These results are consistent with managers repurchasing both to maximize their own wealth and to fund employee stock option exercises. The market appears to recognize this motive, however, and reacts less positively to repurchases announced by firms with high levels of nonmanagerial options.