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When Less Is More: The Benefits of Limits on Executive Pay

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  • Peter Cebon
  • Benjamin E. Hermalin

Abstract

We derive conditions under which limits on executive compensation can enhance efficiency and benefit shareholders (but not executives). Having its hands tied in the future allows a board of directors to credibly enter into relational contracts with executives that are more efficient than performance-contingent contracts. This has implications for the ideal composition of the board. The analysis also offers insights into the political economy of executive-compensation reform.

Suggested Citation

  • Peter Cebon & Benjamin E. Hermalin, 2015. "When Less Is More: The Benefits of Limits on Executive Pay," The Review of Financial Studies, Society for Financial Studies, vol. 28(6), pages 1667-1700.
    • Handle: RePEc:oup:rfinst:v:28:y:2015:i:6:p:1667-1700.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhu140
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    Cited by:

    1. Hermalin, Benjamin E. & Weisbach, Michael S., 2017. "Assessing Managerial Ability: Implications for Corporate Governance," Working Paper Series 2017-01, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    2. Seungjin Han, 2016. "Pre-CEO Executive Skill Accumulation and Firm-CEO Matching with Pay Limits," Department of Economics Working Papers 2016-04, McMaster University.
    3. Liu, Lewis, 2024. "Analyst monitoring and information asymmetry reduction: U.S. evidence on environmental investment," Innovation and Green Development, Elsevier, vol. 3(1).
    4. Dunbar, Craig G. & King, Michael R., 2023. "Syndicate structure and IPO outcomes: The impact of underwriter roles and syndicate concentration," Journal of Corporate Finance, Elsevier, vol. 79(C).

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