Posted: 31 Aug 2011
Date Written: January 2009
This article starts with an overview of the characteristics of chief executive officers (CEOs). I discuss the rising importance of general skills over firm-specific skills and the growing share of externally recruited CEOs. I also discuss possible reasons for the underrepresentation of women and the overrepresentation of family members in the corporate suite. I then review the three main explanations that have been put forward to explain the surge in CEO compensation over the past 30 years: principal-agent view, rent extraction view, and market-based view. I assess the strengths and weaknesses of each of these explanations in light of the existing empirical research. Finally, I review work on how entrenched CEOs or cognitively biased CEOs may cause corporate practices to deviate from the maximization of firm value.
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