Agents With and Without Principals

Marianne Bertrand and Sendhil Mullainathan

No 809, Working Papers from Princeton University, Department of Economics, Industrial Relations Section.

Abstract: Who sets CEO pay? Our standard answer to this question has been shaped by principal agent theory: shareholders set CEO pay. They use pay to limit the moral hazard problem caused by the low ownership stakes of CEOs. Through bonuses, options, or long term contracts, shareholders can motivate the CEO to maximize firm wealth. In other words, shareholders use pay to provide incentives, a view we refer to as the contracting view. An alternative view, championed by practitioners such as Crystal (1991), argues that CEOs set their own pay. They manipulate the compensation committee and hence the pay process itself to pay themselves what they can. The only constraints they face may be the availability of funds or more general fears, such as not wanting to be singled out in the Wall Street Journal as being overpaid. We refer to this second view as the skimming view. In this paper, we investigate the relevance of these two views.

Keywords: CEO pay; shareholders; bonus; options; long term contracts; compensation committee (search for similar items in EconPapers)
JEL-codes: N97 O (search for similar items in EconPapers)
Date: 2000-02
References: Add references at CitEc
Citations: View citations in EconPapers (50)

Downloads: (external link)
https://dataspace.princeton.edu/bitstream/88435/dsp010v8380572/1/430.pdf
Our link check indicates that this URL is bad, the error code is: 500 Internal Server Error

Related works:
Journal Article: Agents with and without Principals (2000)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pri:indrel:430

Access Statistics for this paper

More papers in Working Papers from Princeton University, Department of Economics, Industrial Relations Section. Contact information at EDIRC.
Bibliographic data for series maintained by Bobray Bordelon ().