Corporate Governance When Managers Set Their Own Pay

This paper presents a model of the firm in which the manager has discretion over his own compensation, constrained only by the threat of shareholder intervention. The model addresses two main questions. How does shareholder power affect managers' compensation and their incentives to maximise fi...

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Bibliographic Details
Published in:European financial management : the journal of the European Financial Management Association 2008-11, Vol.14 (5), p.921-943
Main Author: Ruiz-Verdú, Pablo
Format: Article
Language:English
Subjects:
Business studies
Compensation
Corporate finance
Corporate governance
D86
Earnings
Executive compensation
Financial management
G30
G34
L20
M52
managerial power
Senior management
Shareholder activism
shareholder power
Stockholders
Studies
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Summary:This paper presents a model of the firm in which the manager has discretion over his own compensation, constrained only by the threat of shareholder intervention. The model addresses two main questions. How does shareholder power affect managers' compensation and their incentives to maximise firm value? And what is the optimal level of shareholder power? Expectedly, the model shows that increasing shareholder power leads to lower managerial pay. Greater shareholder power, however, also weakens the manager's incentives to maximise value and may even lead to lower profits for shareholders. There might, thus, be too much, as well as too little, shareholder power. The model characterises the optimal level of shareholder power and yields predictions about the relation between shareholder power, managerial pay, performance and firm characteristics.
ISSN:1354-7798
1468-036X
DOI:10.1111/j.1468-036X.2008.00465.x