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Determinants of Directors? Pay in Switzerland: ?Optimal-Contract? versus ?Fat Cat? Explanation

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  • Katja Rost
  • Margit Osterloh

Abstract

Director compensation has become a fashionable topic: Cross-nationally, the earnings of executives and non-executive directors have risen significantly in recent years. Academic literature offers two hypotheses for this trend, a ?fat cat? and an ?optimal-contract? explanation. Proponents of the ?fat cat? explanation state that directors are paid too much due to their unjustified power. Proponents of the ?optimalcontract? hypothesis state that competition in the managerial labour market establishes an optimal compensation contract. This study contrasts both hypotheses and presents evidence that the level of directors? pay in Swiss corporations is to be explained by ?optimal contracts? and by managerial power. We give evidence to which degree the two explanations are valid.

Suggested Citation

  • Katja Rost & Margit Osterloh, 2008. "Determinants of Directors? Pay in Switzerland: ?Optimal-Contract? versus ?Fat Cat? Explanation," CREMA Working Paper Series 2008-26, Center for Research in Economics, Management and the Arts (CREMA).
  • Handle: RePEc:cra:wpaper:2008-26
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    References listed on IDEAS

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    1. Khan, Raihan & Dharwadkar, Ravi & Brandes, Pamela, 2005. "Institutional ownership and CEO compensation: a longitudinal examination," Journal of Business Research, Elsevier, vol. 58(8), pages 1078-1088, August.
    2. Mehran, Hamid, 1995. "Executive compensation structure, ownership, and firm performance," Journal of Financial Economics, Elsevier, vol. 38(2), pages 163-184, June.
    3. Lewellen, Wilbur & Loderer, Claudio & Martin, Kenneth, 1987. "Executive compensation and executive incentive problems : An empirical analysis," Journal of Accounting and Economics, Elsevier, vol. 9(3), pages 287-310, December.
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    Keywords

    director compensation; corporate governance; ?optimal-contracts?; ?fat cat? explanation;

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