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Restricting CEO PayIngolf DittmannErasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); Tinbergen Institute; Erasmus Research Institute of Management (ERIM); European Corporate Governance Institute (ECGI) Ernst G. MaugUniversity of Mannheim - Department of Business Administration and Finance; European Corporate Governance Institute (ECGI) Dan ZhangBI 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 Accepted Paper SeriesDate posted: August 22, 2010 ; Last revised: June 25, 2011Suggested CitationContact Information
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