Towards a Set of Design Principles for Executive Compensation Contracts

66 Pages Posted: 30 Dec 2016

See all articles by Yaowen Shan

Yaowen Shan

University of Technology Sydney; Financial Research Network (FIRN)

Terry S. Walter

University of Sydney; University of Technology, Sydney - School of Finance and Economics; Financial Research Network (FIRN)

Date Written: December 2016

Abstract

Executive compensation has been controversial for many years. Controversies over executive pay have sparked outrage from some sectors and calls for increased regulation and reform. Yet others argue that knee‐jerk reactions to perceived abuses of pay can lead to a host of unintended and inefficient outcomes. This paper argues that much of this controversy is due to executives being rewarded via contracts that have weaknesses in design. We argue that few stakeholders in firms would object to generous compensation for managers whose performance results in abnormally high long‐term shareholder wealth creation. We state a set of principles, developed from a review of the extensive theoretical, regulatory, and empirical literature, that we offer as fundamental building blocks for designing executive remuneration systems in public firms, especially where ownership and control are separated. Our purpose is to generate broad debate and discussion leading to a consensus as to the principles that should be present in all executive compensation contracts such that the interests of shareholders and managers are more closely aligned.

Keywords: Design principles, Executive compensation

Suggested Citation

Shan, Yaowen and Walter, Terry Stirling, Towards a Set of Design Principles for Executive Compensation Contracts (December 2016). Abacus, Vol. 52, Issue 4, pp. 619-684, 2016, Available at SSRN: https://ssrn.com/abstract=2891503 or http://dx.doi.org/10.1111/abac.12090

Yaowen Shan (Contact Author)

University of Technology Sydney ( email )

PO Box 123
Broadway, NSW 2007
Australia

HOME PAGE: http://profiles.uts.edu.au/Yaowen.Shan

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Terry Stirling Walter

University of Sydney ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

University of Technology, Sydney - School of Finance and Economics ( email )

Haymarket
Sydney, NSW 2007
Australia
+61 2 9514 3860 (Phone)
+61 2 9514 7711 (Fax)

HOME PAGE: http://datasearch.uts.edu.au/business/finance/staff/StaffDetails.cfm?UnitStaffId=5373

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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