Executive Compensation and Principal-Agent Theory.

The empirical literature on executive compensation generally fails to specify a model of executive pay on which to base hypotheses regarding its determinants. In contrast, this paper analyzes a simple principal-agent model to determine how well it explains variations in CEO incentive pay and salaries. Many findings are consistent with the basic intuition of principle-agent models that compensation is structured to trade off incentives with insurance. However, statistical significance for some of the effects is weak, although the magnitudes are large. Nevertheless, it seems clear that principle-agent considerations play a role in setting executive compensation. Copyright 1994 by University of Chicago Press.