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Restricting CEO pay

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  • Dittmann, Ingolf
  • Maug, Ernst
  • Zhang, Dan

Abstract

We analyze several proposals to restrict CEO compensation and calibrate two models of executive compensation that describe how firms would react to different types of restrictions. We find that many restrictions would have unintended consequences. Restrictions on total realized (ex-post) payouts lead to higher average compensation, higher rewards for mediocre performance, lower risk-taking incentives, and the fact that some CEOs would be better off with a restriction than without it. Restrictions on total ex-ante pay lead to a reduction in the firm's demand for CEO talent and effort. Restrictions on particular pay components, and especially on cash payouts, can be easily circumvented. While restrictions on option pay lead to lower risk-taking incentives, restrictions on incentive pay (stock and options) result in higher risk-taking incentives.

Suggested Citation

  • Dittmann, Ingolf & Maug, Ernst & Zhang, Dan, 2011. "Restricting CEO pay," Journal of Corporate Finance, Elsevier, vol. 17(4), pages 1200-1220, September.
  • Handle: RePEc:eee:corfin:v:17:y:2011:i:4:p:1200-1220
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    2. repec:eee:jebusi:v:67:y:2013:i:c:p:67-76 is not listed on IDEAS
    3. Cronqvist, Henrik & Fahlenbrach, Rüdiger, 2013. "CEO contract design: How do strong principals do it?," Journal of Financial Economics, Elsevier, vol. 108(3), pages 659-674.
    4. repec:oup:revfin:v:21:y:2017:i:5:p:1805-1846. is not listed on IDEAS
    5. repec:bla:abacus:v:52:y:2016:i:4:p:685-771 is not listed on IDEAS
    6. Shoham, Amir, 2012. "Managing multinational corporations through compensation: The risk-sharing contract method," Journal of Economics and Business, Elsevier, pages 231-239.
    7. Igor Benati & Mario Coccia, 2017. "The relation between public manager compensation and members of parliament’s salary across OECD countries: explorative analysis and possible determinants with public policy implications," quaderni IRCrES 201702, Research Institute on Sustainable Economic Growth - Moncalieri (TO) ITALY - former Institute for Economic Research on Firms and Growth - Moncalieri (TO) ITALY.
    8. John Thanassoulis, 2011. "The Case For Intervening In Bankers' Pay," Economics Series Working Papers 532, University of Oxford, Department of Economics.
    9. repec:eee:jjieco:v:44:y:2017:i:c:p:13-25 is not listed on IDEAS

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