The level and structure of managerial compensation has long been a subject of intense debate. In 2009, and after labeling the sizeable bonus awarded to chief executive officers (CEOs) of companies seeking government bailout as “shameful,” President Obama said that such behavior is “exactly the kind of disregard for the costs and consequences of their actions that brought about this crisis—a culture of narrow self-interest and short-term gain at the expense of everything else.” (Obama 2009, p. 1) Several commentators and academics have expressed concerns over the rising CEO pay level, which cannot be explained by the flat pattern in the firms’ performance and economic conditions over the same period. This leads to higher income inequality and lower shareholders’ value. The high level of CEO pay is widely perceived as unethical and as a form of rent extraction by powerful managers. On the other hand, proponents of higher CEO compensation argue that if rising CEO pay is tied to improving corporate performance, workers and shareholders might be better off if CEOs were paid more, and hence, the observed level of CEO pay is the result of optimal contracting.
A limited, though growing, number of studies has also examined the relationship between managerial compensation and corporate social performance. ...