Shareholder Rights, Boards, and CEO Compensation

48 Pages Posted: 8 May 2003 Last revised: 7 Aug 2008

Rüdiger Fahlenbrach

Ecole Polytechnique Fédérale de Lausanne; Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne

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Date Written: March 12, 2008

Abstract

I analyze the role of executive compensation in corporate governance. As proxies for corporate governance, I use board size, board independence, CEO-chair duality, institutional ownership concentration, CEO tenure, and an index of shareholder rights. The results from a broad cross-section of large U.S. public firms are inconsistent with recent claims that entrenched managers design their own compensation contracts. The interactions of the corporate governance mechanisms with total pay-for-performance and excess compensation can be explained by governance substitution. If a firm has generally weaker governance, the compensation contract helps better align the interests of shareholders and the CEO.

Keywords: Compensation, Corporate Governance, Governance Incentive Substitution

JEL Classification: G32, G34, J33

Suggested Citation

Fahlenbrach, Rüdiger, Shareholder Rights, Boards, and CEO Compensation (March 12, 2008). Charles A. Dice Center Working Paper No. 2008-5 and Fisher College of Business Working Paper No. 2008-03-004; Review of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=390144 or http://dx.doi.org/10.2139/ssrn.390144

Rüdiger Fahlenbrach (Contact Author)

Ecole Polytechnique Fédérale de Lausanne ( email )

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