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CESifo Economic Studies Advance Access published online on June 1, 2009
CESifo Economic Studies, doi:10.1093/cesifo/ifp012
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© The Author 2009. Published by Oxford University Press on behalf of Ifo Institute for Economic Research, Munich. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org

In Search of Reasonable Executive Compensation

Eugene Kandel*

This article makes several observations on the extent of executive compensation and the forms it takes, relating these to the recent literature. I argue that the magnitude of executive compensation seems excessive in light of a wide range of academic studies. I then propose specific regulatory measures that make compensation transparent and predictable for shareholders. Next, a simple taxation of executive compensation above a certain threshold is proposed; I argue that it is a much more efficient way to deal with the issue, than the current legislation in the United States. Turning to the ‘pay for performance’ paradigm, I argue that it must be applied with great care, as, along with the incentives to exert effort it also provides powerful perverse incentives, which are not immediately obvious, may vary dramatically across firms, and may not be well understood by the compensation committees and academics. I outline the design of several generic contracts appropriate for different environments. Finally, I stipulate that the downside of providing too much ‘pay for performance’ is especially evident in financial industry, which is opaque and subject to contagion, thus compensation contract should play a more important role in financial regulation. (JEL codes: G30, K22, M50)

Key Words: managerial compensation • pay for performance • multitasking


* Hebrew University, CEPR and ECGI. email: mskandel{at}mscc.huji.ac.il. I would like to acknowledge helpful discussions with Lucian Bebchuk, Effi Benmelech, Sergei Glaser, Denis Gromb, Yaniv Grinstein, Ilan Guttman, Ohad Kadan, Konstantin Kosenko, Hamid Mehran, Effi Sadka, Pietro Veronesi, Yishay Yafeh, and Harry Yuklea. I also benefited from the comments of the anonymous referee, the participants of the CESIfo 2008 conference on Executive Compensation in Venice, as well as students in the graduate Financial Economics Seminar at the Hebrew University. I would like to thank the Krueger Center for Finance Research for generous financial support.


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CESifo Economic Studies, September 1, 2009; 55(3-4): 399 - 404.
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