ABSTRACT
This chapter describes the reduction in shareholder value caused by these inefficiencies—rather than that caused by excessive managerial pay—could well be the biggest cost arising from managerial influence over compensation. Managerial power and influence have played a key role in shaping the amount and structure of executive compensation. The dominant paradigm for economists' study of executive compensation has long been that pay arrangements are the product of arm's-length bargaining. Directors who safeguard shareholder interests are needed not only to address executive compensation problems but also to tackle the myriad corporate governance problems that would continue to arise even if compensation arrangements were optimized. Strengthened director independence is now widely believed to be key to the effectiveness of the board-monitoring model. An improved corporate elections process would be in the interests of both companies and shareholders. A fundamental limitation of independence requirements is that they fail to provide affirmative incentives for directors to enhance shareholder value.
