CHAPTER 5

Economic Theory

Explaining executive compensation: It’s complicated.

—Kevin Murphy

Kevin Murphy may be the most respected economist focusing on executive compensation in America. He wrote a review article in 2012, in which the last section had the above title. His analysis showed that specific economic theories are incapable of explaining all the results to date (i.e., since the 1930s). Academic study of executive compensation has been ongoing in the United States at least since the 1930s when anecdotal evidence of perceived outrageous compensation at the top became widespread, followed by the accumulation of empirical data thanks to the Securities and Exchange Commission (SEC) and other government agencies.

Early studies tended to ...

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