Thursday, August 31, 2006

Exec Pay

The rise of executive pay, its defenders claim, is no more problematic than the fact that, say, Red Sox slugger Manny Ramirez is paid much more than earlier stars like Ted Williams.

But the process affecting the compensation of star athletes is quite different from the one that determines CEO compensation. A team executive negotiating with an athlete can be expected to be guided by the club's interests, while the player's agent is looking out for the client's demands. When independent buyers and sellers hammer out a transaction this way, the market's invisible hand is commonly expected to produce efficient arrangements.

But in setting executive pay, as we document in our research, directors have not been guided solely by the interests of shareholders. Instead, they have had various economic incentives, reinforced by social and psychological factors, to go along with arrangements favorable to top managers.

See all of the article by Lucian Bebchuk and Rakesh Khurana of Harvard Business School here.

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