Compensation of Powerful CEOs

Abstract

We consider a model of executive compensation in which CEOs have power to influence their compensation and test its implications using CEO compensation data from Execucomp. In the proposed model, CEOs endogenously determine their equity and salary compensation by maximizing the expected utility of their compensation while fulfilling minimal obligations to shareholders. Results from the empirical study with 3,012 CEO-years over 1992-2001 provide evidence that rent-seeking plays a significant role in the determination of CEO compensation. Estimated responses of CEO compensation (total, equity and salary) are consistent with the comparative statics of policy rules from the rent-seeking compensation model. The model and empirical study provide an alternative analytical framework for studying the determinants of CEO compensation and give useful policy insights into the interplay between managerial compensation and investor welfare.

Keywords: CEO compensation, managerial power, Execucomp

JEL Classification: G3, J3