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
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: Suggested Citation