This paper explores the issue of executive compensation as an agency problem, arguing that the design of executive pay is not only a tool to address the agency problem between managers and shareholders but also a part of the agency problem itself. In publicly traded companies with dispersed ownership, boards cannot be expected to negotiate at arm's length with managers, leading to significant managerial influence over their own pay arrangements. Managers have an interest in reducing the visibility of their pay and the extent to which it is decoupled from their performance. The managerial power approach explains many features of the executive compensation landscape, including option plan design, stealth compensation, executive loans, payments to departing executives, retirement benefits, the use of compensation consultants, and the relationship between CEO power and pay. It also explains how managerial influence can lead to inefficient arrangements that produce weak or even perverse incentives. The paper contrasts the managerial power approach with the optimal contracting approach, which views executive compensation as a remedy for the agency problem. The managerial power approach argues that these departures from value-maximizing arrangements are substantial and that compensation practices cannot be adequately explained by optimal contracting alone. The optimal contracting view recognizes that managers suffer from an agency problem and do not automatically seek to maximize shareholder value. However, it is also recognized that directors may suffer from an agency problem, which undermines the board's ability to effectively address the agency problems in the relationship between managers and shareholders. The paper also discusses the limitations of optimal contracting, including the lack of effective constraints on departures from arm's length outcomes, the influence of directors' incentives, and the role of market forces. It argues that the market for corporate control does not impose tight constraints on executive compensation, and that the prevalence of golden parachute provisions and acquisition-related benefits further weakens the disciplinary force of the market. The paper then discusses the managerial power approach in more detail, highlighting the importance of outrage costs and camouflage in shaping executive compensation. It argues that managers have a substantial incentive to obscure and legitimize their extraction of rents, leading to inefficient compensation structures. The paper also discusses the relationship between power and pay, the use of compensation consultants, executive loans, and golden goodbyes. It concludes that managerial influence over the board is a significant factor in the design of executive compensation and that these arrangements can have substantial costs for shareholders.This paper explores the issue of executive compensation as an agency problem, arguing that the design of executive pay is not only a tool to address the agency problem between managers and shareholders but also a part of the agency problem itself. In publicly traded companies with dispersed ownership, boards cannot be expected to negotiate at arm's length with managers, leading to significant managerial influence over their own pay arrangements. Managers have an interest in reducing the visibility of their pay and the extent to which it is decoupled from their performance. The managerial power approach explains many features of the executive compensation landscape, including option plan design, stealth compensation, executive loans, payments to departing executives, retirement benefits, the use of compensation consultants, and the relationship between CEO power and pay. It also explains how managerial influence can lead to inefficient arrangements that produce weak or even perverse incentives. The paper contrasts the managerial power approach with the optimal contracting approach, which views executive compensation as a remedy for the agency problem. The managerial power approach argues that these departures from value-maximizing arrangements are substantial and that compensation practices cannot be adequately explained by optimal contracting alone. The optimal contracting view recognizes that managers suffer from an agency problem and do not automatically seek to maximize shareholder value. However, it is also recognized that directors may suffer from an agency problem, which undermines the board's ability to effectively address the agency problems in the relationship between managers and shareholders. The paper also discusses the limitations of optimal contracting, including the lack of effective constraints on departures from arm's length outcomes, the influence of directors' incentives, and the role of market forces. It argues that the market for corporate control does not impose tight constraints on executive compensation, and that the prevalence of golden parachute provisions and acquisition-related benefits further weakens the disciplinary force of the market. The paper then discusses the managerial power approach in more detail, highlighting the importance of outrage costs and camouflage in shaping executive compensation. It argues that managers have a substantial incentive to obscure and legitimize their extraction of rents, leading to inefficient compensation structures. The paper also discusses the relationship between power and pay, the use of compensation consultants, executive loans, and golden goodbyes. It concludes that managerial influence over the board is a significant factor in the design of executive compensation and that these arrangements can have substantial costs for shareholders.