Too Much Is Not Enough: Incentives in Executive Compensation

By Robert W. Kolb | Go to book overview

1
The Magnitude and Structure of Executive
Compensation

In public perception, executive compensation has always been high. In previous eras, when most businesses were owned by a single person or a family, the perceived avarice of the owners was already an issue and the stuff of literature. As business enterprises grew, the broadening gulf between workers versus owners and senior managers led to greater resentment and wider misunderstanding. By the middle of the nineteenth century, characters emerged such as Ebenezer Scrooge in Charles Dickens’s A Christmas Carol, 1843, and it was in the same period that Friedrich Engels produced his classic The Condition of the Working Class in England, 1845. Scrooge was both the proprietor and manager of his firm. While Engels does not identify the ownership structure of the sweatshops he describes, it is fair to infer that some were single proprietorships while others were managed for their owners. After all, Engels arrived in Manchester, England in 1842 at the behest of his father to work in the cotton-manufacturing firm of Ermen and Engels, with a view to preparing him for a career as owner-manager. (Needless to say, the young Friedrich was to disappoint to his father.)

Today, when we think of executive compensation, the focus is on executive pay in corporations, particularly the pay of the chief executive officer (CEO), but also on the top management team of the firm, which would typically include the chief financial officer (CFO) and a handful of others. While these top executives often hold a significant fraction of their personal wealth in the shares of the firm they manage, their holdings are almost always well below a controlling interest. As early as 1932, Adolf Berle and Gardiner Means described this separation of ownership and control in their book, The Modern Corporation and Private Property, and they realized that this separation of ownership and management would generate conflicts between the goals and desires of owners (the shareholders) and the managers they hired to run the firm in their interest.1

As we will see, this inherent divergence of interest between shareholders and managers—the conflict between principals and their agents—remains a

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