Chapter 12 Agency Problems, Compensation, and Performance Measurement 307
bre44380_ch12_302-326.indd 307 10/08/15 10:46 AM
Management Compensation
Because monitoring is necessarily imperfect, compensation plans must be designed to attract
competent managers and to give them the right incentives.
Figure 12.1 compares the level of compensation in different countries and Figure 12.2
shows the growth of CEO compensation in the U.S. Three features stand out.
- The U.S. has unusually high levels of executive pay. CEOs in the States receive nearly
double the pay of German CEOs and over five times the pay of Japanese CEOs. - Although CEO compensation in the U.S. fell during the 2008–2009 credit crisis, there
has for the most part been a strong upward trend. - A large and increasing fraction of CEO compensation in the U.S. comes from variable
bonuses, stock options, and other long-term incentives.
We look first at the size of the pay package. Then we turn to its contents.
◗ FIGURE 12.1
Median CEO compen-
sation in 2013 for large
companies (those with
revenues of more than
U.S. $5 billion). Compen-
sation in the U.S. is rela-
tively high and is heavily
dependent on perfor-
mance. We are grateful
to Towers Watson for
providing these data.
Source: Towers Watson, http://www.
towerswatson.com.01,000,0002,000,0003,000,0004,000,0005,000,0006,000,000Value in U.S. dollars, $ChinaJapan Brazil
Sweden Australia
MexicoSpain
NetherlandsFranceItaly
GermanyHong Kong
SwitzerlandU.K.
CanadaU.S.Target bonus
SalaryLong-term incentives◗ FIGURE 12.2
Growth in compen-
sation of the CEOs
of companies in the
Standard & Poor’s
Composite Index.
The growth has come
largely from grants of
stock and options.
Source: ExecuComp. We are
grateful to Lin Shen for her
assistance with this figure.010020030040050060070080090010001992199319941995199619971998199920002001200220032004200520062007200820092010201120122013Compensation, $ millionsSalary 1 bonusTotal compensation