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Managerial Power, Stock-Based Compensation, And Firm Performance: Theory And Evidence

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Author Info
Chongwoo Choe
Gloria Tian
Xiangkang Yin

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Abstract

This paper studies theoretically and empirically the relation among CEO power, CEO compensation and firm performance. Our theoretical model follows the rent extraction view of CEO compensation put forward by the managerial power theory, and proxies CEO power by the bargaining power the CEO exercises in the determination of his compensation contract. We show (i) when there is no constraint on the CEO's salary, the CEO's stock-based compensation and the pay-performance sensitivity of CEO compensation are both independent of CEO power, although firm performance net of CEO compensation worsens as CEO power increases, and (ii) when the CEO's salary has a binding cap, the CEO's stock-based compensation and the pay-performance sensitivity of CEO compensation are both increasing in CEO power, resulting in better firm performance gross of CEO compensation, but worse firm performance net of CEO compensation. We test our theoretical findings using the sample of S&P1500 firms over the period of 2001-2005. The predicted relation between power and pay is largely supported. However, the relation between power and firm performance as predicted by theory has mixed support. This suggests that, while the managerial power theory has clear relevance in explaining the relation between power and pay, the scope of power needs to be broadened to have better understanding of how managerial power affects firm performance.

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Paper provided by Monash University, Department of Economics in its series Monash Economics Working Papers with number 21/08.

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Length: 57 pages
Date of creation: 04 Jul 2008
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Handle: RePEc:mos:moswps:2008-21

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Related research
Keywords: Managerial power; agency theory; stock-based incentives; firm performance; pay-performance sensitivity.;

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Find related papers by JEL classification:
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure
J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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