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Determining Executive Pay - Term Paper Example

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This paper provides an overview of the various theories and literature that have been used in trying to explain executive pay in the corporate scene. An examination of the various theories shows that the use in the various literature of the perfect contracting approach theory tends to neglect…
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Determining Executive Pay
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Download file to see previous pages The issue of executive pay is one of the aspects of the business that has been generating newspaper headlines quite often in the recent past. The media tends to regularly display the public outrage on the extreme highs that executive bonuses, financial gratuities, and salaries have reached. In the middle of all this turmoil, many company directors have found it difficult to explain why and how much they pay their various executives as they do. The field of determining and explaining executive pay is dominated by the agency theory’s perfect contracting approach. This theory on executive pay explains that this is a key instrument used in alleviating agency problems. In order to ensure the separation between firm control and firm ownership is harmless, the theory states that executive pay is a key instrument used in aligning the interests between management and shareholders.
Pay setting is often seen as an issue of optimal pay design that is based on risk preferences and market forces.
Market forces contribute to optimal pay structures and levels that compensate the concerned executives for the various risks they took in managing the corporation in the shareholders’ best interests. This is the reason that most of the literature and studies conducted on executive pay structures tend to focus on the relationships between firm performance and executive pay. The results of these often tend to range from negative, positive and even no significant relationship at all. The overall literature consensus is that the performance-pay relationship is often not very strong. These results tend to weaken the common cause for the frequent use of the perfect contracting approach for two main reasons. The main theories that are addressed here are divided into three main approaches. This classification is based on the role that remuneration plays in each theory as well as on the underlying discussions on pay in each theory. ...Download file to see next pagesRead More
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