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http://ssrn.com/abstract=2179036
 
 

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The Managerial Power Approach – A Tautology Revisited


Stefan Winter


Ruhr Universität Bochum - Faculty of Economics

Philip Michels


Ruhr Universität Bochum - Faculty of Economics

November 1, 2012


Abstract:     
CEO compensation is the subject of an ongoing and heated debate. Over the last decade this debate was spurred by the so called managerial power approach. This approach holds that actual compensation of managers is excessive and not consistent with basic principles of optimal contracting theory. Compensation, it suggests, is a result of managerial power. In this view, executives have power and are able to use their power to generate compensation arrangements which are favorable to them. To substantiate their claims, proponents of the managerial power approach refer to empirical evidence that seemingly establishes the existence of a positive association between power and compensation.

However, we will demonstrate that there is not a single piece of empirical evidence of a positive link between power and compensation. This is because the existence of a positive association between power and compensation already and only follows from the very definition of “power” and therefore cannot be empirically tested. The core statement of the managerial power approach is nothing more than a tautology; as a result, the managerial power approach as such has no empirical foundation. Evidence seemingly corroborating the managerial power approach is simply misinterpreted by its proponents.

Number of Pages in PDF File: 29

Keywords: Managerial power approach, Executive compensation, Corporate Governance, Pay for performance

JEL Classification: G32, G34, J33, M12

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Date posted: November 21, 2012  

Suggested Citation

Winter, Stefan and Michels, Philip, The Managerial Power Approach – A Tautology Revisited (November 1, 2012). Available at SSRN: http://ssrn.com/abstract=2179036 or http://dx.doi.org/10.2139/ssrn.2179036

Contact Information

Stefan Winter (Contact Author)
University of Bochum - Faculty of Economics ( email )
Ruhr University of Bochum
Faculty of Economics
D-44780 Bochum, DE 44780
Germany
49-234-3228337 (Phone)
Philip Michels
University of Bochum - Faculty of Economics ( email )
Ruhr University of Bochum
Faculty of Economics
D-44780 Bochum, DE 44780
Germany
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