CEO Power, Compensation, and Governance

CEO Power, Compensation, and Governance

Rui Albuquerque, Jianjun Miao

Series number :

Serial Number: 
324/2012

Date posted :

January 01 2012

Last revised :

November 26 2018
SSRN Share

Keywords

  • CEO power • 
  • moral hazard • 
  • CEO compensation • 
  • Corporate governance • 
  • investor protection

This paper presents a contracting model of governance based on the premise that CEOs are the main promoters of governance change. CEOs use their power to extract higher pay or private benefits, and different governance structures are preferred by different CEOs as they favor one or the other type of compensation.

The model explains why good country- wide investor protection breeds good firm governance and predicts a race to the top in firm-governance quality after the Sarbanes-Oxley Act. However, such governance changes may be associated with higher rather than lower CEO pay as CEOs substitute away from private benefits. The model also provides an explanation for the observed correlation of CEO pay and firm governance as driven by CEO power.

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Authors

Real name:
Jianjun Miao