Explaining Executive Compensation: Managerial Power versus the Perceived Cost of Stock Options

Bebchuk, Fried, and Walker present a compelling case that optimal contracting concerns do not explain the level and structure of executive compensation in US corporations. They offer as an alternative hypothesis that CEO-influenced boards design pay plans to transfer rents to top executives in ways...

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Bibliographic Details
Published in:The University of Chicago law review 2002, Vol.69 (3), p.847-869
Main Author: Murphy, Kevin J.
Format: Article
Language:English
Subjects:
Boards of directors
Business structures
Chief executive officers
Compensation plans
Corporate governance
Costs
Economic costs
Executive compensation
Executive Compensation and Takeovers
Finance companies
Hypotheses
Managerial authority
Market prices
Power
Prescriptions
Repricing
Stock options
Stock prices
Strike prices
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Summary:Bebchuk, Fried, and Walker present a compelling case that optimal contracting concerns do not explain the level and structure of executive compensation in US corporations. They offer as an alternative hypothesis that CEO-influenced boards design pay plans to transfer rents to top executives in ways that mitigate public outrage. Evidence presented by BFW in support of the managerial power view is almost exclusively related to features of stock option plans. Evidence is offered inconsistent with the managerial power hypothesis of BFW and an alternative perceived-cost hypothesis is offered based, in part, on the assumption that companies erroneously perceive the cost of granting options to be far below their economic cost. The managerial power and perceived-cost views of executive compensation differ significantly in their policy implications and prescriptions. Mitigating perceived-cost problems suggest educating managers and boards on the true economic costs of stock options, imposing accounting charges for option grants, and eliminating the asymmetry between the accounting and tax treatment of executive and employee stock options.
ISSN:0041-9494
1939-859X
DOI:10.2307/1600633