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Ideas Festival 2010

Structuring executive compensation

Professor Steven Young, Accounting and Finance
1.30 pm

Few issues in the corporate domain attract more attention from investors, politicians, academics, and the general public than executive compensation. Executive compensation contracts typically contain complicated arrangements designed to resolve agency problems and maximise shareholder wealth. The antecedents and consequences of such arrangements are the subject of extensive research, not least because senior executives play a significant role in determining their own compensation outcomes. Advocates argue that compensation arrangements are efficient and that shareholders benefit as a result; opponents point to frequent examples where pay outcomes appear contrary to shareholders' best interests. I provide insights into this debate by reviewing several strands of the compensation literature related to my own research.

Evidence consistent with the efficient contracting view is widespread: key aspects of contract design accord with theoretical predictions, pay and performance are positively associated, senior executives are dismissed when performance is poor, peer selection for benchmarking purposes does not appear to be driven by opportunism, etc. Nevertheless, examples of questionable practices are plentiful: executives game outcomes to maximise their payoffs, performance targets are less demanding than theory suggests, executives appear to adopt best practice arrangements for symbolic purposes, governance arrangements designed to improve accountability are circumvented, etc. On the key question of whether executive compensation arrangements are characterised by optimal efficiency or unfettered greed, academic research therefore suggests a resounding maybe. Further work aimed at uncovering the truth is clearly warranted!

Biography

Steven Young is based at Lancaster University Management School. His primary teaching and research interests span the interface between corporate financial reporting and corporate finance, and include financial reporting quality, corporate governance arrangements, and corporate distribution policy. Ongoing projects include work on corporate communication policy and performance targets in executive compensation contracts. Professor Young is Associate Editor for the Journal of Business Finance and Accounting and the European Accounting Review, and his research has featured in business media including The Economist, The Times and the Financial Times.

Lancaster University
Bailrigg
LancasterLA1 4YW United Kingdom
+44 (0) 1524 65201