Theories on Executive Pay: A Literature Overview and Critical Assessment

37 Pages Posted: 29 Jan 2008

Date Written: December 2007

Abstract

Executive pay is a major issue in the corporate governance debate. As well in practice as in theory debate still exists how executive pay levels and structures can be explained. This paper provides an overview of 16 theories that have been used in the literature to explain the phenomenon. The theories can be classified into three types of approaches; 1) the value approach; 2) the agency approach; and 3) the symbolic approach. A critical assessment of the theories shows that the dominant use in the literature of the perfect contracting approach of agency theory neglects: 1) the socially determined symbolic value that executive pay could represent, and 2) the contextual conditions under which executive pay is set. A more conclusive understanding of executive pay would be based on considering executive pay as an outcome of socially constructed corporate governance arrangements in which the actors involved have considerable discretion to influence the outcomes. Incorporating such a view in attempts to explain executive pay provides a more conclusive explanation of the recurrent debate on executive pay in theory and practice.

Keywords: executive compensation, corporate governance, literature overview, thoery

JEL Classification: A10, G30, J30, M10, M20

Suggested Citation

Otten, Jordan, Theories on Executive Pay: A Literature Overview and Critical Assessment (December 2007). Available at SSRN: https://ssrn.com/abstract=1088272 or http://dx.doi.org/10.2139/ssrn.1088272

Jordan Otten (Contact Author)

RSM Erasmus University ( email )

P.O. Box 1738
Rotterdam, 3000 DR
Netherlands

HOME PAGE: http://jordanotten.googlepages.com

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