Chapter 17

Executive Compensation and Incentives

Rajesh K. Aggarwal    Carlson School of Management, University of Minnesota


Since the seminal contribution of Jensen and Murphy (1990), our understanding of executive compensation and incentives has greatly improved. Through time, the strength of incentives has increased. In the 1990s, this was accomplished primarily through the use of stock options. The two most important sources of aggregate incentives are holdings of stock and holdings of stock options—these align managers’ interests with those of shareholders. Firm size, firm risk, executive aversion to risk, executive productivity, the extent to which executives like or dislike taking certain actions that matter for shareholders, and ...

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