The Politics of Pay: The Unintended Consequences of Regulating Executive Compensation

62 Pages Posted: 16 Apr 2018 Last revised: 20 Apr 2018

See all articles by Kevin J. Murphy

Kevin J. Murphy

University of Southern California - Marshall School of Business; USC Gould School of Law

Michael C. Jensen

Harvard Business School; SSRN; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Harvard University - Accounting & Control Unit

Date Written: April 18, 2018

Abstract

The persistent outrage over CEO pay expressed by politicians, the press, media, labor unions, and the general public (but not shareholders) have prompted the imposition of a wide range of disclosure requirements, tax policies, accounting rules, governance reforms, direct legislation, and other rules constraining executive compensation stretching back nearly a century. We analyze the regulations that have substantially damaged the efficacy of CEO pay practices, ranging from the first disclosure rules in the 1930s to the 2018 Trump tax rules. We discuss the political forces behind the regulatory interventions, and assess the continuing unintended consequences of these interventions. Our emerging conclusion is that the best way the government can fix executive compensation is to stop trying to fix it, and by undoing the damage already caused through existing regulations that have, in aggregate, imposed enormous costs on organizations, their shareholders, and social welfare.

Keywords: Executive compensation, CEO pay, regulation, compensation committees

JEL Classification: G38, J33, M48, M52

Suggested Citation

Murphy, Kevin J. and Jensen, Michael C., The Politics of Pay: The Unintended Consequences of Regulating Executive Compensation (April 18, 2018). USC Law Legal Studies Paper No. 18-8; USC CLASS Research Paper No. CLASS18-8. Available at SSRN: https://ssrn.com/abstract=3153147 or http://dx.doi.org/10.2139/ssrn.3153147

Kevin J. Murphy (Contact Author)

University of Southern California - Marshall School of Business ( email )

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USC Gould School of Law

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Michael C. Jensen

Harvard Business School ( email )

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HOME PAGE: http://drfd.hbs.edu/fit/public/facultyInfo.do?facInfo=ovr&facId=6484

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National Bureau of Economic Research (NBER) ( email )

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European Corporate Governance Institute (ECGI) ( email )

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Harvard University - Accounting & Control Unit ( email )

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United States

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