MANAGERIAL POWER, STOCK-BASED COMPENSATION, AND FIRM PERFORMANCE: THEORY AND EVIDENCE

Chongwoo Choe, Gloria Tian and Xiangkang Yin

No 21/08, Monash Economics Working Papers from Monash University, Department of Economics

Abstract: This paper studies theoretically and empirically the relation among CEO power, CEO compensation and firm performance. Our theoretical model follows the rent extraction view of CEO compensation put forward by the managerial power theory, and proxies CEO power by the bargaining power the CEO exercises in the determination of his compensation contract. We show (i) when there is no constraint on the CEO's salary, the CEO's stock-based compensation and the pay-performance sensitivity of CEO compensation are both independent of CEO power, although firm performance net of CEO compensation worsens as CEO power increases, and (ii) when the CEO's salary has a binding cap, the CEO's stock-based compensation and the pay-performance sensitivity of CEO compensation are both increasing in CEO power, resulting in better firm performance gross of CEO compensation, but worse firm performance net of CEO compensation. We test our theoretical findings using the sample of S&P1500 firms over the period of 2001-2005. The predicted relation between power and pay is largely supported. However, the relation between power and firm performance as predicted by theory has mixed support. This suggests that, while the managerial power theory has clear relevance in explaining the relation between power and pay, the scope of power needs to be broadened to have better understanding of how managerial power affects firm performance.

Keywords: Managerial power; agency theory; stock-based incentives; firm performance; pay-performance sensitivity. (search for similar items in EconPapers)
JEL-codes: D82 G32 J33 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2008-07-04
New Economics Papers: this item is included in nep-bec and nep-lab
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Managerial Power, Stock-Based Compensation, and Firm Performance: Theory and Evidence (2009)
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