Agents with and without Principals


Who sets CEO pay? Our standard answer to this question has been shaped by principal agent theory:
shareholders set CEO pay. They use pay to limit the moral hazard problem caused by the low ownership
stakes of CEOs. Through bonuses, options, or long term contracts, shareholders can motivate the CEO to
maximize firm wealth. In other words, shareholders use pay to provide incentives, a view we refer to as the
contracting view.
An alternative view, championed by practitioners such as Crystal (1991), argues that CEOs set their
own pay. They manipulate the compensation committee and hence the pay process itself to pay themselves
what they can. The only constraints they face may be the availability of funds or more general fears, such
as not wanting to be singled out in the Wall Street Journal as being overpaid. We refer to this second view
as the skimming view. In this paper, we investigate the relevance of these two views.

Year of Publication
Date Published
Publication Language
Citation Key
The American Economic Review, Vol. 90, No. 2, Papers and Proceedings of the One Hundred Twelfth Annual Meeting of the American Economic Associatio, May, 2000
Working Papers