CEO Power, Compensation, and Governance
Annals of Economics and Finance Vol. 14, 2013
38 Pages Posted: 8 Aug 2006 Last revised: 29 Dec 2014
Date Written: July 20, 2012
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: Suggested Citation