Publication: Corporate governance when managers set their own pay
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2007-02
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Abstract
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 questions: How does shareholder power affect managers' compensation and their incentives to
maximize firm value? And, which is the optimal level of shareholder power? Increasing
shareholder power leads to lower managerial pay, yet it also weakens managers' incentives to
maximize value. The model shows that, because of this incentive effect, restricting shareholder
power is necessary to obtain financing, and offers predictions about the relation between the
optimal level of shareholder power, performance and firm characteristics.
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Executive compensation, Corporate governance, Shareholder power, Managerial discretion over pay