1. See especially M. Jensen and K.J. Murphy, ‘CEO Incentives: It’s Not How Much You Pay, But How’, 68 Harvard Business Review (1990) p. 138; and M. Jensen and K.J. Murphy, ‘Performance Pay and Top Management Incentives’, 98 Journal of Political Economy (1990) p. 225.
2. Between 1992 and 2000, the average real (inflation adjusted) pay of chief executive officers (CEOs) of S&P 500 firms more than quadrupled, climbing from $3.5 million to $14.7 million. This increase far outstripped that of compensation for other employees. In 1991, the average large-company CEO received approximately 140 times the pay of an average worker, while in 2003 the ratio was about 500:1. The most pronounced component of the trend has been the explosion in stock option grants, with the value of option-based compensation (on a Black-Scholes basis) increasing ninefold during the bull market of the 1990s (figures drawn from p. 1 of Pay without Performance).
3. Since the early 1990s, the number of studies aimed at explaining the various features of executive compensation arrangements has grown even faster than the CEO pay packages: see K.J. Murphy, ‘Executive Compensation’, in O. Ashenfelter and D. Card, eds., Handbook of Labor Economics, Vol. 3, bk. 2 (New York, Elsevier 1999).
4. In most US corporations, the board of directors is responsible for determining the compensation of the CEO and other top executives, following the indications of the internal ‘compensation committee’. However, corporate by-laws may grant the compensation committee full and exclusive authority on the issue.
5. See, among others, L.J. Barris ‘The Overcompensation Problem: A Collective Approach to Controlling Executive Pay’, 68 Indiana Law Journal (1992) p. 59; E.W. Orts, ‘Shirking and Sharking: a Legal Theory of the Firm’, 16 Yale Law and Policy Review (1996) p. 265; C.M. Yablon, ‘Bonus Questions — Executive Compensation in the Era of Pay for Performance’, 75 Notre Dame Law Review (1999) p. 271.