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CEO Power, Compensation, and Governance

  • Rui Albuquerque

    ()

    (School of Management, Boston University)

  • Jianjun Miao

    ()

    (Department of Economics, Boston University)

This paper presents a contracting model of governance based on the premise that CEOs are the main promoters of governance change. CEOs use their power to extract higher pay or private benefits, and different governance structures are preferred by different CEOs as they favour one or the other type of compensation. The model explains why good countrywide investor protection breeds good firm governance and predicts a 'race to the top' in firm-governance quality after the Sarbanes-Oxley Act. However, such governance changes may be associated with higher rather than lower CEO pay as CEOs substitute away from private benefits. The model also provides an explanation for the observed correlation of CEO pay and firm governance based on CEO power. Finally, we discuss the optimality of introducing randomness in CEO hiring, for example, by evaluating CEOs based on qualitative characteristics, or soft skills, that are prone to diverse judgements.

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Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - Working Papers Series with number WP2006-034.

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Length: pages
Date of creation: Jun 2006
Date of revision:
Handle: RePEc:bos:wpaper:wp2006-034
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Web page: http://www.bu.edu/econ/
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