CEO Compensation, Change, and Corporate Strategy

CEO compensation can influence the kinds of strategies that firms adopt. We argue that performance-related compensation creates an incentive to look for overly ambitious, hard to implement strategies. At a cost, shareholders can curb this tendency by precommitting to a regime of CEO overcompensation in highly changeable environments. Alternatively shareholders can commit to low CEO pay, although this requires a commitment mechanism (either by the board of the individual company, or by the society as a whole) to counter the incentive to renegotiate upwards. We study the conditions under which the different policies for CEO compensation are preferred by shareholders.

[1]  Richard S. Ruback,et al.  The Market for Corporate Control: The Scientific Evidence , 2002 .

[2]  Rajesh Aggarwal,et al.  The Other Side of the Trade‐Off: The Impact of Risk on Executive Compensation , 1999, Journal of Political Economy.

[3]  Andrei Shleifer,et al.  Management entrenchment: The case of manager-specific investments , 1989 .

[4]  H. Demsetz,et al.  The Structure of Corporate Ownership: Causes and Consequences , 1985, Journal of Political Economy.

[5]  X. Gabaix,et al.  Why Has CEO Pay Increased so Much? , 2006 .

[6]  A. Shleifer,et al.  What Do Firms Do with Cash Windfalls? , 1993 .

[7]  Holger M. Mueller,et al.  Keeping the Board in the Dark: CEO Compensation and Entrenchment , 2005 .

[8]  John E. Core,et al.  Stock Option Plans for Non-Executive Employees , 2000 .

[9]  René M. Stulz,et al.  A Test of the Free Cash Flow Hypothesis: The Case of Bidder Returns , 1991 .

[10]  A. Shleifer,et al.  Management Entrenchment the Case of Manager-specific Investments* , 2001 .

[11]  Canice Prendergast,et al.  The Tenuous Trade‐off between Risk and Incentives , 2000, Journal of Political Economy.

[12]  Annette B. Poulsen,et al.  The Returns to Acquiring Firms in Tender Offers: Evidence from Three Decades , 1989 .

[13]  P. Bolton,et al.  An incomplete contracts approach to financial contracting , 1992 .

[14]  W. Guay,et al.  The Other Side of the Trade-Off: The Impact of Risk on Executive Compensation: A Revised Comment , 2002 .

[15]  Kevin J. Murphy,et al.  The Prince and the Pauper? CEO Pay in the United States and United Kingdom , 2000 .

[16]  W. Guay,et al.  The Other Side of the Trade-Off : The Impact of Risk on Executive Compensation A Comment John Core * , 2001 .

[17]  S. Kaplan,et al.  Do Investment-Cash Flow Sensitivities Provide Useful Measures of Financing Constraints? , 1997 .

[18]  Kevin J. Murphy,et al.  Performance Pay and Top-Management Incentives , 1990, Journal of Political Economy.

[19]  F. Robert,et al.  Bruner, of Evidence from the Decision-Maker, Journal of Applied Finance 1, . , 2002 .

[20]  A. Shleifer,et al.  A Survey of Corporate Governance , 1996 .

[21]  Kevin J. Murphy,et al.  Performance Pay and Top Management Incentives , 1990 .

[22]  Larry H. P. Lang,et al.  Dividend announcements: Cash flow signalling vs. free cash flow hypothesis? , 1989 .

[23]  Daniel J. McCarthy,et al.  View from the top: Henry Mintzberg on strategy and management , 2000 .

[24]  D. Larcker,et al.  Executive Equity Compensation and Incentives: A Survey , 2002 .

[25]  Bjarke Fog,et al.  William J. Baumol: Business Behavior, Value and Growth. The Macmillan Company, New York, 1959, 159 sider , 1960 .

[26]  Paul R. Milgrom,et al.  Multitask Principal–Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design , 1991 .

[27]  D. Larcker,et al.  Performance Consequences of Mandatory Increases in Executive Stock Ownership , 2000 .

[28]  J. Fred Weston,et al.  Takeovers, restructuring, and corporate governance = 接管、重组与公司治理 , 1998 .

[29]  M. C. Jensen,et al.  Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers , 1999 .

[30]  M. C. Jensen,et al.  Eclipse of the Public Corporation , 1999 .

[31]  Steven V. Mann,et al.  The Agency Costs of Free Cash Flow: Acquisition Activity and Equity Issues , 1993 .

[32]  Oliver Hart,et al.  Firms, contracts, and financial structure , 1995 .

[33]  Owen A. Lamont.  Cash Flow and Investment: Evidence from Internal Capital Markets , 1996 .

[34]  R. Cyert,et al.  Theory of the Firm , 1966 .

[35]  William J. Baumol,et al.  Business Behavior, Value and Growth. , 1960 .

[36]  Michael C. Jensen,et al.  A Theory of the Firm: Governance, Residual Claims, and Organizational Forms , 2001 .

[37]  O. Hart,et al.  Property Rights and the Nature of the Firm , 1988, Journal of Political Economy.

[38]  John M. Barron,et al.  Executive compensation. , 1990, Trustee : the journal for hospital governing boards.

[39]  William J. Baumol,et al.  Business Behavior, Value, and Growth , 1960 .

[40]  Shorey Peterson,et al.  The Modern Corporation and Private Property. , 1933 .

[41]  R. Marris,et al.  The economic theory of "managerial" capitalism , 1964 .

[42]  Anjan V. Thakor,et al.  Firms, Contracts and Financial Structures. , 1996 .

[43]  James A. Brickley,et al.  The Market for Corporate Control: The Empirical Evidence Since 1980 , 1988 .

[44]  Robert F. Bruner,et al.  The gains to bidding firms from merger , 1983 .

[45]  E. Brousseau,et al.  The Economics of Contracts: Bibliography , 2002 .

[46]  O. Williamson.  The economics of discretionary behavior : managerial objectives in a theory of the firm , 1965 .

[47]  R. Albuquerque,et al.  CEO Power, Compensation and Governance , 2006 .

[48]  Luigi Zingales,et al.  Do Financing Constraints Explain Why Investment is Correlated with Cash Flow? , 1995 .

[49]  Michael Bradley,et al.  Synergistic gains from corporate acquisitions and their division between the stockholders of target and acquiring firms , 1988 .

[50]  Jeffrey B. Liebman,et al.  Are CEOS Really Paid Like Bureaucrats? , 1997 .