CEO compensation can influence the kinds of strategies that firms adopt. We argue that performance-related compensation creates an incentive to look for overly ambitious, hard to implement strategies. At a cost, shareholders can curb this tendency by precommitting to a regime of CEO overcompensation in highly changeable environments. Alternatively shareholders can commit to low CEO pay, although this requires a commitment mechanism (either by the board of the individual company, or by the society as a whole) to counter the incentive to renegotiate upwards. We study the conditions under which the different policies for CEO compensation are preferred by shareholders. Copyright 2005 by The American Finance Association.
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Volume (Year): 60 (2005) Issue (Month): 6 (December) Pages: 2701-2727 Download reference. The following formats are available: HTML
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