Abstract

http://ssrn.com/abstract=1660490
 
 

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Restricting CEO Pay


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 - Department of Business Administration and Finance; European Corporate Governance Institute (ECGI)

Dan Zhang


BI Norwegian Business School

February 23, 2011

Journal of Corporate Finance, Forthcoming
ECGI - Finance Working Paper No. 291/2010

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.

Number of Pages in PDF File: 46

Keywords: Executive compensation, caps on pay, loss aversion

JEL Classification: G30, M52

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Date posted: August 22, 2010 ; Last revised: June 25, 2011

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: http://ssrn.com/abstract=1660490

Contact Information

Ingolf Dittmann
Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )
P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands
+31 10 4081283 (Phone)
+31 10 4089165 (Fax)
HOME PAGE: http://people.few.eur.nl/dittmann/
Tinbergen Institute
P.O. Box 1738
3000 DR Rotterdam
Netherlands
Erasmus Research Institute of Management (ERIM)
P.O. Box 1738
3000 DR Rotterdam
Netherlands
European Corporate Governance Institute (ECGI) ( email )
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
Ernst G. Maug (Contact Author)
University of Mannheim - Department of Business Administration and Finance ( email )
D-68131 Mannheim
Germany
HOME PAGE: http://cf.bwl.uni-mannheim.de
European Corporate Governance Institute (ECGI)
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
Dan Zhang
BI Norwegian Business School ( email )
Nydalsveien 37
Oslo, 0442
Norway
HOME PAGE: http://www.bi.edu/research/employees/?ansattid=A1210112
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