This paper presents a managerial power approach to executive compensation, arguing that executive pay arrangements are not only a tool to address the agency problem between managers and shareholders but also part of the agency problem itself. In publicly traded companies with dispersed ownership, boards cannot be expected to bargain at arm's length with managers, leading to managers having significant influence over their own pay. They have an interest in reducing the saliency of their pay and the extent to which it is decoupled from their performance. The managerial power approach explains many features of executive compensation, including option plan design, stealth compensation, executive loans, payments to departing executives, retirement benefits, 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 perverse incentives. The optimal contracting approach, which views executive compensation as a remedy for the agency problem, is challenged by the managerial power approach. The former assumes that boards design compensation to provide efficient incentives for shareholder value maximization, while the latter argues that managerial influence and rent-seeking behavior significantly shape compensation arrangements. The managerial power approach suggests that compensation arrangements are often shaped by market forces and managerial influence, with departures from value-maximizing arrangements being substantial. This approach highlights the importance of transparency and the role of outsiders' perceptions in shaping compensation practices. The paper discusses various aspects of executive compensation, including the relationship between power and pay, the use of compensation consultants, executive loans, and golden goodbyes. It argues that managerial power and rent extraction significantly influence compensation arrangements, leading to inefficiencies and suboptimal outcomes. The managerial power approach provides a framework for understanding the complexities of executive compensation, emphasizing the role of managerial influence and the need for transparency in compensation practices.This paper presents a managerial power approach to executive compensation, arguing that executive pay arrangements are not only a tool to address the agency problem between managers and shareholders but also part of the agency problem itself. In publicly traded companies with dispersed ownership, boards cannot be expected to bargain at arm's length with managers, leading to managers having significant influence over their own pay. They have an interest in reducing the saliency of their pay and the extent to which it is decoupled from their performance. The managerial power approach explains many features of executive compensation, including option plan design, stealth compensation, executive loans, payments to departing executives, retirement benefits, 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 perverse incentives. The optimal contracting approach, which views executive compensation as a remedy for the agency problem, is challenged by the managerial power approach. The former assumes that boards design compensation to provide efficient incentives for shareholder value maximization, while the latter argues that managerial influence and rent-seeking behavior significantly shape compensation arrangements. The managerial power approach suggests that compensation arrangements are often shaped by market forces and managerial influence, with departures from value-maximizing arrangements being substantial. This approach highlights the importance of transparency and the role of outsiders' perceptions in shaping compensation practices. The paper discusses various aspects of executive compensation, including the relationship between power and pay, the use of compensation consultants, executive loans, and golden goodbyes. It argues that managerial power and rent extraction significantly influence compensation arrangements, leading to inefficiencies and suboptimal outcomes. The managerial power approach provides a framework for understanding the complexities of executive compensation, emphasizing the role of managerial influence and the need for transparency in compensation practices.