To each according to her luck and power: Optimal corporate governance and compensation policy in a dynamic world
AbstractWe model long-run firm performance, management compensation, and corporate governance in a dynamic, nonstationary world. We show that managerial compensation and governance policies, which, in a single-period context, can best be rationalized by self-serving managerial influence over board policy, are shareholder-wealth maximizing in a dynamic setting. For example, shareholder wealth is maximized by governance policies that tie board deference to generous compensation and link the level of current compensation more to luck than performance. Further, under shareholder-wealth maximizing polices, managerial diversion of firm resources for private consumption is likely to accompany stock price declines which immediately follow sustained price increases and lax board oversight. Unless the the likelihood of a control transfer is large, stock-based managerial compensation may not produce as much shareholder value as simple salary contracts.
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Bibliographic InfoPaper provided by Oxford Financial Research Centre in its series OFRC Working Papers Series with number 2007fe06.
Date of creation: 2007
Date of revision:
governance; institutional design;
Find related papers by JEL classification:
- G20 - Financial Economics - - Financial Institutions and Services - - - General
- G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-11-17 (All new papers)
- NEP-BEC-2007-11-17 (Business Economics)
- NEP-CFN-2007-11-17 (Corporate Finance)
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