To each according to her luck and power: Optimal corporate governance and compensation policy in a dynamic world

Thomas Noe () and Michael J. Rebello

OFRC Working Papers Series from Oxford Financial Research Centre

Abstract: 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 polices, 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 the likelihood of a control transfer is large, stock-based managerial compensation may not produce as much shareholder value as simple salary contracts.

Keywords: governance; institutional design (search for similar items in EconPapers)
JEL-codes: G20 G34 (search for similar items in EconPapers)
Pages: 69
Date: 2007
New Economics Papers: this item is included in nep-bec and nep-cfn
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