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Journal of Economic Perspectives—Volume 17, Number 3—Summer 2003—Pages 71–92

Executive Compensation as an Agency
Lucian Arye Bebchuk and Jesse M. Fried


xecutive compensation has long attracted a great deal of attention from financial economists. Indeed, the increase in academic papers on the subject of CEO compensation during the 1990s seems to have outpaced even the remarkable increase in CEO pay itself during this period (Murphy, 1999).
Much research has focused on how executive compensation schemes can help alleviate the agency problem in publicly traded companies. To understand adequately the landscape of executive compensation, however, one must recognize that the design of compensation arrangements is also partly a product of this same agency problem.

Alternative Approaches to Executive Compensation
Our focus in this paper is on publicly traded companies without a controlling shareholder. When ownership and management are separated in this way, managers might have substantial power. This recognition goes back, of course, to Berle and Means (1932, p. 139) who observed that top corporate executives, “while in office, have almost complete discretion in management.” Since Jensen and Meckling (1976), the problem of managerial power and discretion has been analyzed in modern finance as an “agency problem.”
Managers may use their discretion to benefit themselves personally in a variety

y Lucian Arye Bebchuk is the William J. Friedman Professor of Law, Economics and Finance,
Harvard Law School, and Research Associate, National Bureau of Economic Research, both in Cambridge, Massachusetts. Jesse M. Fried is a Professor of Law at Boalt Hall School of
Law, University of California at Berkeley, Berkeley, California. Their e-mail addresses are
͗͘ and ͗͘, respectively.


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