The Determinants of Executive Compensation

Abstract

Research on the determinants of executive compensation has a very long tradition in a variety of academic fields. This chapter focuses on the key ideas that emerge from a review of this work, especially in the management literature. Executive pay is generally determined by economic factors, social factors, and political factors, each of which is examined in this chapter. Economic factors include size, performance, human capital, risk, and marginal product. Managerial discretion, discussed in Chapter 2, also plays a big role. Social factors tend to fall into three categories—institutional pressures, social comparison processes, and social capital—each of which suggests alternative predictors of executive compensation. Finally, political factors are very much about power. The chapter concludes with a short section on the compensation of general managers at a business-unit level. Keywords: executive compensation, social comparison, marginal product, power, social capital, human capital