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CEO Power, Compensation and Governance

Author

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  • Albuquerque, Rui
  • Miao, Jianjun

Abstract

This paper presents a contracting model of governance based on the premise that CEOs are the main promoters of governance change. CEOs use their power to extract higher pay or private benefits, and different governance structures are preferred by different CEOs as they favour one or the other type of compensation. The model explains why good countrywide investor protection breeds good firm governance and predicts a 'race to the top' in firm-governance quality after the Sarbanes-Oxley Act. However, such governance changes may be associated with higher rather than lower CEO pay as CEOs substitute away from private benefits. The model also provides an explanation for the observed correlation of CEO pay and firm governance based on CEO power. Finally, we discuss the optimality of introducing randomness in CEO hiring, for example, by evaluating CEOs based on qualitative characteristics, or soft skills, that are prone to diverse judgements.

Suggested Citation

  • Albuquerque, Rui & Miao, Jianjun, 2006. "CEO Power, Compensation and Governance," CEPR Discussion Papers 5818, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:5818
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    2. Ting, Hsiu-I & Chueh, Horace & Chang, Pang-Ru, 2017. "CEO power and its effect on performance and governance: Evidence from Chinese banks," Emerging Markets Review, Elsevier, vol. 33(C), pages 42-61.
    3. Ting, Hsiu-I & Huang, Po-Kai, 2018. "CEOs’ power and perks: Evidence from Chinese banks," Journal of Economics and Business, Elsevier, vol. 97(C), pages 19-27.

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    More about this item

    Keywords

    Ceo power; Moral hazard; Ceo compensation; Investor protection;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • K00 - Law and Economics - - General - - - General (including Data Sources and Description)

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