Executive compensation and firm leverage: a policy oriented survey

Abstract

This paper surveys the literature that studies the connection between leverage and executive compensation. First, we discuss the dynamics of pay-for-performance compensation and how to measure it. Then we study the theoretical underpinnings of how firm leverage may be related to the compensation structure of its executives. After reviewing the empirical work on the topic we survey the policy implications. We discuss recent work that shows positive outcomes from regulating executive compensation, but that raises a cautionary note: regulating leverage directly seems more efficient than regulating executive compensation.