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Managerial Power, Stock-Based Compensation, And Firm Performance: Theory And Evidence

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  • Chongwoo Choe
  • Gloria Tian
  • Xiangkang Yin

Abstract

This paper studies theoretically and empirically the relation among CEO power, CEO compensation and firm performance. Our theoretical model follows the rent extraction view of CEO compensation put forward by the managerial power theory, and proxies CEO power by the bargaining power the CEO exercises in the determination of his compensation contract. We show (i) when there is no constraint on the CEO's salary, the CEO's stock-based compensation and the pay-performance sensitivity of CEO compensation are both independent of CEO power, although firm performance net of CEO compensation worsens as CEO power increases, and (ii) when the CEO's salary has a binding cap, the CEO's stock-based compensation and the pay-performance sensitivity of CEO compensation are both increasing in CEO power, resulting in better firm performance gross of CEO compensation, but worse firm performance net of CEO compensation. We test our theoretical findings using the sample of S&P1500 firms over the period of 2001-2005. The predicted relation between power and pay is largely supported. However, the relation between power and firm performance as predicted by theory has mixed support. This suggests that, while the managerial power theory has clear relevance in explaining the relation between power and pay, the scope of power needs to be broadened to have better understanding of how managerial power affects firm performance.

Suggested Citation

  • Chongwoo Choe & Gloria Tian & Xiangkang Yin, 2008. "Managerial Power, Stock-Based Compensation, And Firm Performance: Theory And Evidence," Monash Economics Working Papers 21/08, Monash University, Department of Economics.
  • Handle: RePEc:mos:moswps:2008-21
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    Cited by:

    1. Dey, Tania & Banerjee, Rajabrata, 2011. "Can Corporate Diversification Promote Firm Value? A Survey," MPRA Paper 28928, University Library of Munich, Germany.
    2. Hongfei Tang, 2014. "Are CEO stock option grants optimal? Evidence from family firms and non-family firms around the Sarbanes–Oxley Act," Review of Quantitative Finance and Accounting, Springer, vol. 42(2), pages 251-292, February.
    3. Richard Heaney & Vineet Tawani & John Goodwin, 2010. "Australian CEO Remuneration," Economic Papers, The Economic Society of Australia, vol. 29(2), pages 109-127, June.
    4. Choe Chongwoo & Park In-Uck, 2011. "Information, Authority, and Corporate Hierarchies," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 11(1), pages 1-39, February.
    5. Choe, Chongwoo & Tian, Gloria Y. & Yin, Xiangkang, 2014. "CEO power and the structure of CEO pay," International Review of Financial Analysis, Elsevier, vol. 35(C), pages 237-248.

    More about this item

    Keywords

    Managerial power; agency theory; stock-based incentives; firm performance; pay-performance sensitivity.;

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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