CEO Power and the Structure of CEO Pay

Abstract

This paper fleshes out the rent extraction view of CEO compensation put forward by the managerial power theory (Bebchuk et al., 2002), and tests its main implications on the relation between CEO power and the structure of CEO pay. For a measure of CEO power most relevant to managerial power theory, we use the CEO pay slice due to Bebchuk et al. (2011). Based on the sample of S&P500 firms ovor the period of 1999-2008, we find that the implied relation between power and pay is largely supported. Our findings suggest that managerial power theory has relevance in explaining the relation between power and pay when the focus is on managerial bargaining power. Given the multiple dimensions of CEO power, however, the scope of power may need to be broadened for a better understanding of how managerial power affects firm performance.

Keywords: Managerial power, CEO pay, stock-based compensation

JEL Classification: D82, G32, J33