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What is corporate governance?
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Key topics
 The big picture
 Stock price formation
 Fundamental value analysis
International corp. governance

Incentive mechanisms
 Decision system
Performance monitoring
 Incentive based compensation
 Bankruptcy system
 Ownership structure
 Creditor structure
 Capital structure
 Market for corporate control
Labor market competition
Product market competition

Related topics
Transaction cost economics
 Positive economics



Incentive based compensation

Introduction: Incentive based compensation is here defined as the systems that regulate the pecuniary compensation of executives or investment managers. These systems are of major importance in corporate governance because their design determines the incentives of the managers and thereby the economic efficiency of the businesses they manage. Classic references on incentive based compensation systems are Hart and Holmström [1987, part 1] and Murphy [1999].


  • Table - Hypotheses: Effects of incentive based compensation systems on corporate performance and other other kinds of institutions of relevance for corporate governance.
  • Theoretical model - The agency model: The principal agency theory offers a rigorous explanation of the classic tradeoff between risk and incentives.
  • White paper - Performance fees: This white paper on performance fees offers a high level analysis of how performance fees for investment managers function and how to structure them so that they work in the best interest of the investors who pays them rather than against their interest.
  • Empirical model - Executive compensation: Determinants of executive compensation in listed US firms - Definitions and justifications.
  • Exhibition - Risk defined: The concepts of risk aversion, risk neutrality and risk loving.
  • Table - International corporate governance: Tentative characterizations of legal and empirical state of large firm incentive based compensation system in various countries as of 1980-95: 1) Developing countries. 2) Germany. 3) Japan. 4) Anglo-American countries. 5) Denmark.

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