ABSTRACT
In this chapter we investigate how the income and influence of business leaders are related to organizational settings and personal conditions – among others, to occupation, multipositionality and education. The income and influence of business leaders are frequently interpreted in social science within the conceptual framework of agency, power and prestige. The explosive growth of performance-based executive compensation was a notable characteristic of late twentieth century economic scene, and was considered a way to align the incentives of managers with the interests of shareholders, and therefore was a solution to the underlying agency problem: that the shareholder cannot observe and contract upon actions taken by managers that affect profitability, that is, the shareholders’ returns. The issue in contract design is to provide the agent with the incentive to take the privately costly action. The optimal contract reflects a trade-off between the incentive benefit of conditioning the agent’s compensation on the observed level of profit, and the cost of inefficiently allocating the risk to the risk-averse party. As shown by Crocker and Slemrod (2007), it is also important in the optimal contract to minimize the agent’s incentive to falsify earnings reports. One of the solutions is to offer equity incentives for managers. Those firms whose CEOs have relatively high amounts of equity incentives in the form of unrestricted stock and immediately exercisable options are more likely to engage in earnings management by reporting small earnings increases. Performance-based executive compensation (Jensen and Zimmerman 1985) is a closely related concept. It suggests that compensation packages of top-level executives help align manager and shareholder interests. Executive compensation and executive turnover are positively related to stock-price performance, and the adoption of short- and long-run compensation plans is associated with increases in shareholder wealth.
