Journal of Law, Finance, and Accounting > Vol 3 > Issue 2

The Politics of Pay: The Unintended Consequences of Regulating Executive Compensation

Kevin J. Murphy, University of Southern California - Marshall School of Business, USA, kjmurphy@usc.edu , Michael C. Jensen, Harvard Business School, USA, mjensen@hbs.edu
 
Suggested Citation
Kevin J. Murphy and Michael C. Jensen (2018), "The Politics of Pay: The Unintended Consequences of Regulating Executive Compensation", Journal of Law, Finance, and Accounting: Vol. 3: No. 2, pp 189-242. http://dx.doi.org/10.1561/108.00000030

Publication Date: 21 Dec 2018
© 2018 K. J. Murphy and M. C. Jensen
 
Subjects
Corporate governance,  Disclosure,  Executive compensation,  Performance measurement,  Taxation,  Political history,  Presidential politics,  Regulation
 
Keywords
CEO PayCompensation CommitteesGovernment Intervention
 

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In this article:
1. The Ugly 
2. The (Merely) Bad 
3. The Good 
4. Conclusion 
References 

Abstract

The persistent outrage over CEO pay expressed by politicians, the press, media, labor unions, and the general public (but not shareholders) have prompted the imposition of a wide range of disclosure requirements, tax policies, accounting rules, governance reforms, direct legislation, and other rules constraining executive compensation stretching back nearly a century. We analyze the regulations that have substantially damaged the efficacy of CEO pay practices, ranging from the first disclosure rules in the 1930s to the 2018 Trump tax rules. We discuss the political forces behind the regulatory interventions, and assess the continuing unintended consequences of these interventions. Our emerging conclusion is that the best way the government can fix executive compensation is to stop trying to fix it, and by undoing the damage already caused through existing regulations that have, in aggregate, imposed enormous costs on organizations, their shareholders, and social welfare.

DOI:10.1561/108.00000030