How to Control and Reward Managers? The Paradox of the 90s. From Optimal Contract Theory to a Political Economy Approach
Опубликовано на портале: 25-03-2008
Research & Regulation Working Papers.
2005.
No. 2005-1.
Тематические разделы:
Why did CEOs remuneration exploded during the 90s and persisted to high levels, even
after
the bursting out of the Internet bubble? This article surveys the alternative explanations
that have
been given of this paradox mainly by various economic theories with some extension
to political
science, business administration, social psychology, moral philosophy, network analysis.
Basically,
it is argued that the diffusion of stock-options and financial market related incentives,
that were
supposed to discipline managers, have entitled them to convert their intrinsic power
into
remuneration and wealth, both at the micro and macro levels. This is the outcome
of a de facto
alliance of executives with financiers, who have thus exploited the long run erosion
of wage earners’
bargaining power.
At the company level, the power of top-managers derives from their control over financial
information, and from a better knowledge than outsiders of the sources of company
profitability.
This power of top-managers is directly linked to the ability for a company to generate
profits, via
the complementarity of specific assets, at odds with the conventional neoclassical
theory that
assumes a cybernetic approach concerning the substitution of factors of production
in response
to the price signal of markets. Insider trading, the low sensitivity of CEOs compensation
with
respect to performance in large companies, the contradictory impact of mergers and
acquisitions
upon managers on one side shareholder on the other side, and the rarity of indexed
stock-options
are relevant empirical evidences of this intrinsic, micro founded, power of managers.
Why financial scandals about excessive CEOs compensation took place at the end of
the 90s
and not before? A political economy approach complements the previous one and conveys
the
hypothesis that CEOs and CFOs have converted a part of their economic power into
a political
power, expressed at the society wide level. Generous stock-options grants derive
from the impact
of financial liberalisation, contemporary societies seem to accept more easily the
widening of
inequalities, whereas many governments tend to be pro-business: they lower the taxation
of
capital but they increase households taxation and weaken the redistributive role
of tax and
welfare systems.
The article finally discusses the possible reforms that could reduce the probability
and the
adverse consequences of CEOs and top-managers opportunism: reputation, business ethic,
legal
sanctions, public auditing of companies, or shift from a shareholder to a stakeholder
conception).