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

Kevin J. Murphy and Michael Jensen

Journal of Law, Finance, and Accounting, 2018, vol. 3, issue 2, 189-242

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.

Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:now:jnllfa:108.00000030

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