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Restricting CEO pay

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Author Info

  • Dittmann, Ingolf
  • Maug, Ernst
  • Zhang, Dan

Abstract

We analyze several proposals to restrict CEO compensation and calibrate two models of executive compensation that describe how firms would react to different types of restrictions. We find that many restrictions would have unintended consequences. Restrictions on total realized (ex-post) payouts lead to higher average compensation, higher rewards for mediocre performance, lower risk-taking incentives, and the fact that some CEOs would be better off with a restriction than without it. Restrictions on total ex-ante pay lead to a reduction in the firm's demand for CEO talent and effort. Restrictions on particular pay components, and especially on cash payouts, can be easily circumvented. While restrictions on option pay lead to lower risk-taking incentives, restrictions on incentive pay (stock and options) result in higher risk-taking incentives.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Corporate Finance.

Volume (Year): 17 (2011)
Issue (Month): 4 (September)
Pages: 1200-1220

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Handle: RePEc:eee:corfin:v:17:y:2011:i:4:p:1200-1220

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Web page: http://www.elsevier.com/locate/jcorpfin

Related research

Keywords: Executive compensation Caps on pay Loss aversion;

References

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Citations

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Cited by:
  1. repec:eee:jebusi:v:67:y:2013:i:c:p:67-76 is not listed on IDEAS
  2. Henrik CRONQVIST & Rüdiger FAHLENBRACH, . "CEO Contract Design: How Do Strong Principals Do It?," Swiss Finance Institute Research Paper Series 11-14, Swiss Finance Institute.
  3. John Thanassoulis, 2011. "The Case For Intervening In Bankers' Pay," Economics Series Working Papers 532, University of Oxford, Department of Economics.
  4. Shoham, Amir, 2012. "Managing multinational corporations through compensation: The risk-sharing contract method," Journal of Economics and Business, Elsevier, vol. 64(3), pages 231-239.

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