Restricting CEO Pay
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)
BI Norwegian Business School
February 23, 2011
Journal of Corporate Finance, Forthcoming
ECGI - Finance Working Paper No. 291/2010
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.
Number of Pages in PDF File: 46
Keywords: Executive compensation, caps on pay, loss aversion
JEL Classification: G30, M52
Date posted: August 22, 2010 ; Last revised: June 25, 2011
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