Articles week 6

Question 1

Optimal Contracting Theory

Answer 1

Assumes boards set pay to motivate managers to act in shareholders’ best interests.

Pay is designed to link rewards with good performance.

Question 2

Managerial Power Theory

Answer 2

Says executives have too much influence over their pay.

Pay is not always tied to performance, but rather shaped to look fair while benefiting executives.

Question 3

What’s wrong with the “optimal contracting” theory according to Bebchuk & Fried?

Answer 3

It assumes boards negotiate fairly with CEOs, but in reality, boards are often influenced or controlled by executives

Question 4

What is “stealth compensation”?

Answer 4

Hidden forms of pay, like pension boosts or cheap loans, that aren’t clearly reported to shareholders

Question 5

What is a “gratuitous goodbye payment”?

Answer 5

A big payout given to a CEO upon departure, even if they performed poorly and it wasn’t required by their contract.

Question 6

What is the role of “outrage” in executive pay?

Answer 6

Executives design pay packages to avoid public outrage, making excessive compensation less visible.

Question 7

How can compensation consultants help camouflage pay?

Answer 7

By justifying high pay using selective data and peer comparisons that favor the CEO.