Restricting CEO Pay

Dittmann, Ingolf; Maug, Ernst G.; Zhang, Dan

Download This Paper

Open PDF in Browser

Add Paper to My Library

Restricting CEO Pay

Journal of Corporate Finance, Forthcoming

ECGI - Finance Working Paper No. 291/2010

46 Pages Posted: 22 Aug 2010 Last revised: 16 Feb 2021

See all articles by Ingolf Dittmann

Ingolf Dittmann

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Tinbergen Institute; Erasmus Research Institute of Management (ERIM); European Corporate Governance Institute (ECGI)

Ernst G. Maug

University of Mannheim Business School; European Corporate Governance Institute (ECGI)

Dan Zhang

Oslo Business School

Date Written: February 23, 2011

Abstract

We analyze several proposals to restrict CEO compensation and calibrate two models of executive compensation that describe how firms would react to different types of restrictions. We find that many restrictions would have unintended consequences. Restrictions on total realized (ex-post) payouts lead to higher average compensation, higher rewards for mediocre performance, lower risk-taking incentives, and the fact that some CEOs would be better off with a restriction than without it. Restrictions on total ex-ante pay lead to a reduction in the firm's demand for CEO talent and effort. Restrictions on particular pay components, and especially on cash payouts, can be easily circumvented. While restrictions on option pay lead to lower risk-taking incentives, restrictions on incentive pay (stock and options) result in higher risk-taking incentives.

Keywords: Executive compensation, caps on pay, loss aversion

JEL Classification: G30, M52

Suggested Citation: Suggested Citation

Dittmann, Ingolf and Maug, Ernst G. and Zhang, Dan, Restricting CEO Pay (February 23, 2011). Journal of Corporate Finance, Forthcoming, ECGI - Finance Working Paper No. 291/2010, Available at SSRN: https://ssrn.com/abstract=1660490