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CEO Power, Compensation and Governance

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

September 2006

CEPR Discussion Paper No. 5818

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 favour one or the other type of compensation. The model explains why good countrywide 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 based on CEO power. Finally, we discuss the optimality of introducing randomness in CEO hiring, for example, by evaluating CEOs based on qualitative characteristics, or soft skills, that are prone to diverse judgements.

Number of Pages in PDF File: 40

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

JEL Classification: G34, J33, K00

Date posted: October 13, 2006  

Suggested Citation

Albuquerque, Rui A. and Miao, Jianjun, CEO Power, Compensation and Governance (September 2006). CEPR Discussion Paper No. 5818. Available at SSRN: https://ssrn.com/abstract=937399

Contact Information

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 )
B-1050 Brussels
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
Feedback to SSRN

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