CEO Compensation, Change, and Corporate Strategy

James Dow and Clara Raposo ()

Journal of Finance, 2005, vol. 60, issue 6, 2701-2727

Abstract: 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.

Date: 2005
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https://doi.org/10.1111/j.1540-6261.2005.00814.x

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Persistent link: https://EconPapers.repec.org/RePEc:bla:jfinan:v:60:y:2005:i:6:p:2701-2727

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