When it comes to analyzing managerial compensation—such as bonuses, stocks, and options—don't believe everything that's reported, warn George-Levi Gayle and Robert Miller. In their study, published recently in the American Economic Review, the Tepper professors found that those huge executive pay packages, decried by much of the media, are essential to the economy. What is often overlooked, they point out, is that those seemingly cushy pay packages are typically comprised of stock in the executive's own company. What better motivation, they argue, to make CEOs mindful of shareholders' interests.

On the other hand, Gayle and Miller contend that replacing incentive-based executive pay packages with fixed wages would jeopardize the economy. "Such a change," says Miller, "would do serious harm to the fiscal health of corporations and the wealth of shareholders, which in some cases is the U.S. taxpayer." He points out that, according to their research, eliminating incentive-based components could cut the value of U.S. firms by half within eight years—an astounding loss by any measure.

Shannon Deep (HS'10)