To each according to her luck and power: Optimal corporate governance and compensation policy in a dynamic world
We model long-run firm performance, management compensation, and corporate governance in a dynamic, nonstationary world.� We show that managerial compensation and governance policies, which, in a single-period context, can best be rationalized by self-serving managerial influence over board policy, are shareholder-wealth maximizing in a dynamic setting.� For example, shareholder wealth is maximized by governance policies that tie board deference to generous compensation and link the level of current compensation more to luck than performance.� Further, under shareholder-wealth maximizing policies, managerial diversion of firm resources for private consumption is likely to accompany stock price declines which immediately follow sustained price increases and lax board oversight.� Unless the likelihood of a control transfer is large, stock-based managerial compensation may not produce as much shareholder value as simple salary contracts.
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|Date of creation:||01 Oct 2007|
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