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Corporate governance when managers set their own pay

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  • Ruiz-Verdú, Pablo

Abstract

This paper presents a model of the firm in which the manager has discretion over his own compensation, constrained only by the threat of shareholder intervention. The model addresses two questions: How does shareholder power affect managers' compensation and their incentives to maximize firm value? And, which is the optimal level of shareholder power? Increasing shareholder power leads to lower managerial pay, yet it also weakens managers' incentives to maximize value. The model shows that, because of this incentive effect, restricting shareholder power is necessary to obtain financing, and offers predictions about the relation between the optimal level of shareholder power, performance and firm characteristics.

Suggested Citation

  • Ruiz-Verdú, Pablo, 2007. "Corporate governance when managers set their own pay," DEE - Working Papers. Business Economics. WB wb070803, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
    • Handle: RePEc:cte:wbrepe:wb070803
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    References listed on IDEAS

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