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Why Do Some CEOs Work for a One-Dollary Salary?

  • Loureiro, Gilberto

    (University of Minho)

  • Makhija, Anil K.

    (OH State University)

  • Zhang, Dan

    (Erasmus University Rotterdam)

We find evidence consistent with the view that $1 CEO salaries are a ruse hiding the rentseeking pursuits of CEOs adopting these pay schemes. CEOs with these arrangements, despite the drastic cuts in salary, have total compensation that is similar to that at other firms, making up lost salary through not-so-visible forms of equity-based compensation. There is greater likelihood of a $1 CEO salary when the CEO is rich, overconfident, owns a sizeable ownership stake, and institutional ownership is relatively low. These powerful CEOs are in a position to draw significant undue private benefits, and need not replace certain salary dollars with risky future income. However, we find that they are at risk of engendering public outrage over their private benefits, against which the $1 salary constitutes valuable deflection of attention. Shareholders of firms with $1 CEO salaries do not fare well in the aftermath of these adoptions. Thus, rather than being the sacrificial acts they are projected to be, our findings suggest that adoptions of $1 CEO salaries are opportunistic behavior of the wealthier, more overconfident, influential CEOs. Overall, these findings support the Managerial Power Hypothesis in the literature, which claims that CEOs employ camouflage in compensation schemes to avoid public outrage over excessive private benefits.

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Paper provided by Ohio State University, Charles A. Dice Center for Research in Financial Economics in its series Working Paper Series with number 2011-7.

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Date of creation: Mar 2011
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Handle: RePEc:ecl:ohidic:2011-7
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