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

Peter Cebon and Benjamin Hermalin

The Review of Financial Studies, 2015, vol. 28, issue 6, 1667-1700

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.

Date: 2015
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