When Less is More: How Limits on Executive Pay Can Result in Greater Managerial Effort and the Adoption of Better Strategies

47 Pages Posted: 4 Dec 2013

See all articles by Peter Cebon

Peter Cebon

University of Melbourne

Benjamin E. Hermalin

University of California, Berkeley

Date Written: December 3, 2013

Abstract

We derive conditions under which state-imposed limits on executive compensation can enhance efficiency and benefit shareholders (but not executives). Having their hands tied in the future allows a board of directors to credibly enter into relational contracts with executives that are more efficient than performance-based contracts. This in turn can have implications for firm strategy and the ideal composition of the board. The analysis also offers insights into the political economy of executive-compensation reform.

Keywords: Executive compensation, boards of directors, relational vs. performance-based contracting

JEL Classification: G3, D86

Suggested Citation

Cebon, Peter and Hermalin, Benjamin E., When Less is More: How Limits on Executive Pay Can Result in Greater Managerial Effort and the Adoption of Better Strategies (December 3, 2013). Available at SSRN: https://ssrn.com/abstract=2362967 or http://dx.doi.org/10.2139/ssrn.2362967

Peter Cebon

University of Melbourne ( email )

185 Pelham Street
Carlton, Victoria 3053
Australia
+61403771141 (Phone)

Benjamin E. Hermalin (Contact Author)

University of California, Berkeley ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
510-642-7575 (Phone)
510-643-1420 (Fax)

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