CEO Power, Compensation, and Governance

Annals of Economics and Finance Vol. 14, 2013

38 Pages Posted: 8 Aug 2006 Last revised: 29 Dec 2014

Rui A. Albuquerque

Boston College, Carroll School of Management; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Jianjun Miao

Boston University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: July 20, 2012

Abstract

This paper presents a contracting model of governance based on the premise that CEOs are the main promoters of governance change. CEOs use their power to extract higher pay or private benefits, and different governance structures are preferred by different CEOs as they favor one or the other type of compensation. The model explains why good country- wide investor protection breeds good firm governance and predicts a race to the top in firm-governance quality after the Sarbanes-Oxley Act. However, such governance changes may be associated with higher rather than lower CEO pay as CEOs substitute away from private benefits. The model also provides an explanation for the observed correlation of CEO pay and firm governance as driven by CEO power.

Keywords: CEO power, moral hazard, CEO compensation, corporate governance, investor protection

JEL Classification: G34, J33, K00

Suggested Citation

Albuquerque, Rui A. and Miao, Jianjun, CEO Power, Compensation, and Governance (July 20, 2012). Annals of Economics and Finance Vol. 14, 2013. Available at SSRN: https://ssrn.com/abstract=922700 or http://dx.doi.org/10.2139/ssrn.922700

Rui A. Albuquerque (Contact Author)

Boston College, Carroll School of Management ( email )

140 Commonwealth Avenue
Chustnut Hill, MA 02467-3808
United States

HOME PAGE: http://ruialbuquerque.webs.com

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Jianjun Miao

Boston University - Department of Economics ( email )

270 Bay State Road
Boston, MA 02215
United States
617-353-6675 (Phone)

HOME PAGE: http://people.bu.edu/miaoj

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