The Norm/Satisfaction Hypothesis – Conjectures and Evidence on the Mechanisms that Drive CEO Pay

Abstract

A model is presented of the mechanisms that drive CEO pay (at Swedish, large cap public corporations). Given that the model describes what actually goes on in the negotiating process ‐ based on extensive interviews ‐ a norm/satisfaction hypothesis might be more relevant in explaining that process, rather than the current favorites, the optimal contracting or the managerial power hypothesis. The model explains the upward ratcheting of CEO pay and observed non‐contentious bargaining. Furthermore, based on the utility of information signaling, the negotiation space is diagrammatically described and found to be bounded close to existing market norms. The paper challenges the functionality of two newcomers in corporate governance: Pay transparency and the Board Compensation Committee.

JEL Classification: J33