Managerial Power, Stock-Based Incentives, and Firm Performance

27 Pages Posted: 17 May 2006

See all articles by Chongwoo Choe

Chongwoo Choe

Monash University - Department of Economics

Xiangkang Yin

Deakin University; Financial Research Network (FIRN)

Date Written: May 15, 2006

Abstract

This paper studies the relation between managerial power, the manager's compensation contract, and firm performance when the manager's contract comprises a stock-based pay and a fixed salary. When there is no cap on the manager's salary, the size of the manager's stock-based compensation is the same regardless of managerial power, and the salary is used as a channel for rent extraction by the manager. This implies that managerial power does not lead to a distortion in efficiency, but only results in wealth transfer from shareholders to managers. Thus firm performance gross of management compensation is independent of managerial power, although firm performance net of management compensation decreases in managerial power. When there is a binding cap on the manager's salary, the manager's stock-based compensation increases in managerial power. Overall, managerial power weakly improves the manager's work incentives but at the cost to outside shareholders due to rent extraction by the manager.

Keywords: Managerial power, agency theory, stock-based incentives, firm performance

JEL Classification: D82, G32, J33

Suggested Citation

Choe, Chongwoo and Yin, Xiangkang, Managerial Power, Stock-Based Incentives, and Firm Performance (May 15, 2006). Available at SSRN: https://ssrn.com/abstract=902500 or http://dx.doi.org/10.2139/ssrn.902500

Chongwoo Choe (Contact Author)

Monash University - Department of Economics ( email )

Department of Economics
PO Box 197
Caulfield East, Victoria 3145
Australia
+61 2 9903 1125 (Phone)
+61 2 9903 1128 (Fax)

Xiangkang Yin

Deakin University ( email )

Melbourne, Victoria
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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