Determinants of Directors' Pay in Switzerland: 'Optimal-Contract' versus 'Fat Cat' Explanation

38 Pages Posted: 14 Oct 2007

See all articles by Katja Rost

Katja Rost

University of Zurich - Institute for Organization and Administrative Science

Margit Osterloh

University of Basel; Professor (em.) University of Zurich

Date Written: January 4, 2007

Abstract

Director compensation has become a fashionable topic: Cross-nationally, the earnings of executives and non-executive directors have risen significantly in recent years. Academic literature offers two hypotheses for this trend, a "fat cat" and an "optimal-contract" explanation. Proponents of the "fat cat" explanation state that directors are paid too much due to their unjustified power. Proponents of the "optimal-contract" hypothesis state that competition in the managerial labour market establishes an optimal compensation contract. This study contrasts both hypotheses and presents evidence that the level of directors' pay in Swiss corporations is to be explained by "optimal contracts" and by managerial power. We give evidence to which degree the two explanations are valid.

Keywords: executive compensation, optimal contracts, suboptimal contracts, market power

JEL Classification: J3, J41, G34

Suggested Citation

Rost, Katja and Osterloh, Margit, Determinants of Directors' Pay in Switzerland: 'Optimal-Contract' versus 'Fat Cat' Explanation (January 4, 2007). Available at SSRN: https://ssrn.com/abstract=1019754 or http://dx.doi.org/10.2139/ssrn.1019754

Katja Rost (Contact Author)

University of Zurich - Institute for Organization and Administrative Science ( email )

Plattenstrasse 14
CH-8032 Zurich
Switzerland

Margit Osterloh

University of Basel ( email )

Petersplatz 1
Basel, CH-4003
Switzerland

Professor (em.) University of Zurich ( email )

Südstrasse 11
Zürich, CH-8008
Switzerland

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