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CEO Power, Compensation and Governance

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Albuquerque, Rui
Miao, Jianjun

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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 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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5818.

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Date of creation: Sep 2006
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Handle: RePEc:cpr:ceprdp:5818

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Related research
Keywords: CEO compensation; CEO power; investor protection; moral hazard;

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Find related papers by JEL classification:
G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
K00 - Law and Economics - - General - - - General (including Data Sources and Description)

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