Corporate Governance Reform and CEO Compensation: Intended and Unintended Consequences

28 Pages Posted: 28 Apr 2005

See all articles by Ella Mae Matsumura

Ella Mae Matsumura

University of Wisconsin-Madison - Department of Accounting and Information Systems

Jae Yong Shin

Seoul National University - College of Business Administration

Abstract

Recent scandals allegedly linked to CEO compensation have brought executive compensation and perquisites to the forefront of debate about constraining executive compensation and reforming the associated corporate governance structure. We briefly describe the structure of executive compensation, and the agency theory framework that has commonly been used to conceptualize executives acting on behalf of shareholders. We detail some criticisms of executive compensation and associated ethical issues, and then discuss what previous research suggests are likely intended and unintended consequences of some widely proposed executive compensation reforms. We explicitly discuss the following recommendations for reform: require greater independence of compensation committees, require executives to hold equity in the corporation, require greater disclosure of executive compensation, increase institutional investor involvement in corporate governance (including executive compensation), and require firms to expense stock options on their income statements. We provide a brief summary discussion of ethical issues related to executive compensation, and describe possible future research.

Keywords: Corporate governance, executive compensation, independent compensation committee, institutional investor, stock-based compensation

JEL Classification: M41, M52, G23, J33, G34

Suggested Citation

Matsumura, Ella Mae and Shin, Jae Yong, Corporate Governance Reform and CEO Compensation: Intended and Unintended Consequences. Available at SSRN: https://ssrn.com/abstract=707742

Ella Mae Matsumura (Contact Author)

University of Wisconsin-Madison - Department of Accounting and Information Systems ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States
608-262-9731 (Phone)
608-265-6040 (Fax)

Jae Yong Shin

Seoul National University - College of Business Administration ( email )

Seoul, 151-742
Korea, Republic of (South Korea)

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