Do CEOs Set Their Own Pay? The Ones Without Principals Do
AbstractWe empirically examine two competing views of CEO pay. In the contracting view, pay is used to solve an agency problem: the compensation committee optimally chooses pay contracts which give the CEO incentives to maximize shareholder wealth. In the skimming view, pay is the result of an agency problem: CEOs have managed to capture the pay process so that they set their own pay, constrained somewhat by the availability of cash or by a fear of drawing shareholders' attention. To distinguish these views, we first examine how CEO pay responds to luck, observable shocks to performance beyond the CEO's control. Using several measures of luck, such as changes in oil price for the oil industry, we find substantial pay for luck. Pay responds about as much to a lucky' dollar as to a general dollar. Most importantly, we find that better governed firms pay their CEOs less for luck. Our second test examines how much CEOs are charged for the options they are granted. Since options never appear on balance sheets, they might offer an appealing way to skim. Here again we find a crucial role for governance: CEOs in better governed firms are charged more for the options they are given. These results suggest that both views of CEO pay matter. In poorly governed firms, the skimming view fits better (pay for luck and little charge for options) while in well governed firms, the contracting view fits better (filtering out of luck and charging for options).
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7604.
Date of creation: Mar 2000
Date of revision:
Note: CF LS
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Web page: http://www.nber.org
More information through EDIRC
Find related papers by JEL classification:
- G3 - Financial Economics - - Corporate Finance and Governance
- J3 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs
This paper has been announced in the following NEP Reports:
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Dinardo, John & Hallock, Kevin F & Pischke, Jörn-Steffen, 2000.
"Unions And The Labour Market For Managers,"
CEPR Discussion Papers
2418, C.E.P.R. Discussion Papers.
- Jenter, Dirk, 2004.
"Executive Compensation, Incentives, and Risk,"
4466-02, Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Thomas Piketty & Emmanuel Saez, 2001. "Income Inequality in the United States, 1913-1998 (series updated to 2000 available)," NBER Working Papers 8467, National Bureau of Economic Research, Inc.
- Pierre-André Chiappori & Bernard Salanié, 2002.
"Testing Contract Theory : A Survey of Some Recent Work,"
2002-11, Centre de Recherche en Economie et Statistique.
- Pierre André Chiappori & Bernard Salanié, 2002. "Testing Contract Theory: A Survey of Some Recent Work," CESifo Working Paper Series 738, CESifo Group Munich.
- Art Durnev & Sergei Guriev, 2007.
"The Resource Curse: A Corporate Transparency Channel,"
w0108, Center for Economic and Financial Research (CEFIR).
- Durnev, Artyom & Guriev, Sergei, 2007. "The Resource Curse: A Corporate Transparency Channel," CEPR Discussion Papers 6547, C.E.P.R. Discussion Papers.
- Brian J. Hall & Kevin J. Murphy, 2000.
"Stock Options for Undiversified Executives,"
NBER Working Papers
8052, National Bureau of Economic Research, Inc.
- Goergen, Marc & Renneboog, Luc, 2011. "Managerial compensation," Journal of Corporate Finance, Elsevier, vol. 17(4), pages 1068-1077, September.
- Wolfers, Justin, 2002. "Are Voters Rational? Evidence from Gubernatorial Elections," Research Papers 1730, Stanford University, Graduate School of Business.
- Julio Segura, 2004. "Competencia, disciplina de mercado y regulación en presencia de conflictos de interés en las empresas," Hacienda Pública Española, IEF, vol. 169(2), pages 135-170, June.
- Paul Oyer, 2000.
"Why Do Firms Use Incentives that Have No Incentive Effects?,"
Econometric Society World Congress 2000 Contributed Papers
1440, Econometric Society.
- Paul Oyer, 2004. "Why Do Firms Use Incentives That Have No Incentive Effects?," Journal of Finance, American Finance Association, vol. 59(4), pages 1619-1650, 08.
- Oyer, Paul, 2001. "Why Do Firms Use Incentives That Have No Incentive Effects?," Research Papers 1686, Stanford University, Graduate School of Business.
- Sautner, Zacharias & Weber, Martin, 2005. "Corporate Governance and the Design of Stock Option Programs," Sonderforschungsbereich 504 Publications 05-32, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.