I. INTRODUCTION AND OVERVIEW

Compensation paid to the top executives of publicly traded corporations is a politically sensitive area, with critics claiming that amounts paid executives are too high (e.g., Crystal 1991), and corporations arguing they need to pay well to attract, retain, and motivate quality people (e.g., Kay 1998). ^[1] Opponents of current levels of executive pay, for example the AFL-CIO (Rose 1998), have resorted to publicizing what they feel are excessive amounts via their Executive Pay Watch Internet Site ( and introducing legislation in Congress (see Appendices 10.1, 10.2, and 10.3). Others have argued (e.g., Jensen and Murphy 1990b) that it's not how much you pay, but how you pay that matters. Regardless of your view, executive compensation, in particular that of the chief executive officer (CEO), is well followed in both academic journals and the popular press. For example, annual surveys of executive compensation are a fixture in most business publications and major newspapers, for example, Forbes, Business Week, Fortune, The Wall Street Journal, and The Philadelphia Inquirer.

Executive compensation is important. A well-designed compensation plan can reward both executives and shareholders, whereas a poorly designed one can waste corporate resources without motivating the executive. Research has shown that when the corporation is performing poorly, shareholder proposals on executive compensation are likely to be made (Thomas and Martin 1999). Other...