Managerial Power and CEO Pay

47 Pages Posted: 17 Aug 2017 Last revised: 29 Jan 2020

See all articles by Robert F. Göx

Robert F. Göx

University of Zurich - Department of Business Administration (IBW); University of Zurich - Managerial Accounting; University of Zurich - Faculty of Economics, Business Administration and Information Technology

Thomas Hemmer

Rice University - Jesse H. Jones Graduate School of Business

Date Written: December 22, 2017

Abstract

We study how the CEO's power over the board of directors affects pay levels and the structure of optimal compensation contracts and derive unexpected results. First, a more powerful CEO generally receives more pay and a contract with a higher pay-performance sensitivity (PPS) if firm performance is low. In contrast, if firm performance is high, more CEO power translates into less pay and a lower PPS. Second, considering a special case of our general model, we show that more powerful CEOs receive higher salaries, more stocks but a nonincreasing number of options. Third, we find that the presence of a powerful CEO generally leaves the optimal use of relative performance evaluation unaffected. However, we identify conditions under which the sensitivity of CEO pay to peer performance can be increasing in the CEO's power over the board. Overall, our results suggest that frequently used indicators of poor (or sound) compensation practices should be interpreted with care.

Keywords: executive compensation, optimal contracting, managerial power theory

JEL Classification: D86, J33, M12, M41, M52

Suggested Citation

Goex, Robert F. and Hemmer, Thomas, Managerial Power and CEO Pay (December 22, 2017). AAA 2018 Management Accounting Section (MAS) Meeting, Available at SSRN: https://ssrn.com/abstract=3020732 or http://dx.doi.org/10.2139/ssrn.3020732

Robert F. Goex (Contact Author)

University of Zurich - Department of Business Administration (IBW) ( email )

Plattenstrasse 14
Zurich, 8032
Switzerland

University of Zurich - Managerial Accounting ( email )

Plattenstrasse 14
Zurich, CH-8032
Switzerland

University of Zurich - Faculty of Economics, Business Administration and Information Technology ( email )

Plattenstrasse 14
Zürich, 8032
Switzerland

Thomas Hemmer

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

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