Executive Compensation : A Theory Review and Trend Determination

Abstract: In the middle of the financial turmoil, many managers are blamed by journalists or politicians to be responsible for the crisis. For unknown reasons, this crisis born elsewhere than in large quoted companies, has struck top executives and CEOs, accused by an angry public to benefit from excessive compensations. However this wave of protest has highlighted the field of executive compensation and sparked the academic debate regarding the determinants of executive pay, with a particular focus on the relation between pay and performance.   In this paper we discuss the role and attributes of executives, their remuneration schemes and the trend evolution in terms of package components and overall amounts. To delimit our study, we focus on the Anglo-American model only; the most criticized one, especially because of the important part covered by stock options. We conduct a theory review to provide a clear understanding of what executive compensation is and the impact it can have on the performance and long-term value creation. To help us achieve this, we use the agency theory, explaining the relationship between the agent, being the executive, and the principal, being the shareholder. We aim at determining whereas there is a un-balance in the power distribution, linked to a managerial power increase. Trough a case study about Bank of America, we study the protests around executive pay, before concluding and questioning ourselves about the economic sense of compensation packages.