Journal article
When less is more: The benefits of limits on executive pay
P Cebon, BE Hermalin
Review of Financial Studies | Published : 2015
DOI: 10.1093/rfs/hhu140
Abstract
We derive conditions under which limits on executive compensation can enhance efficiency and benefit shareholders (but not executives). Having its hands tied in the future allows a board of directors to credibly enter into relational contracts with executives that are more efficient than performance-contingent contracts. This has implications for the ideal composition of the board. The analysis also offers insights into the political economy of executive-compensation reform.
Grants
Awarded by Nuffield College, University of Oxford
Funding Acknowledgements
The authors thank Bob Gibbons for introducing us to each other. This collaboration was facilitated by a visiting professorship granted Hermalin by RMIT University, Melbourne. The authors also thank Catherine de Fontenay, Sven Feldmann, Marina Halac, Mike Weisbach, and seminar participants at Hitotsubashi University, Said Business School, and the University of Warwick for their valuable comments and suggestions. The financial support of the Australian Research Council Discovery Grant DP1094986 and the Thomas and Alison Schneider Distinguished Professorship in Finance are also gratefully acknowledged, as is the hospitality extended Hermalin by Nuffield College, University of Oxford. Send correspondence to Benjamin E. Hermalin, University of California, Department of Economics, 530 Evans Hall #3880, Berkeley, CA 94720-3880; telephone (510) 642-7575. E-mail: hermalin@berkeley.edu.