Executive Compensation and Contracting

This paper explores the implications of principal-agent theory for executive compensation to identify explanations for a number of compensation practices and to identify a variety of puzzles. We suggest several potential explanations for the level of executive compensation, highlight the role and causes of incentive-based compensation, identify several puzzling aspects of the design of employee stock option grant programs and address the role and incentives of the board of directors and their interaction with the firm’s management.