Restricting CEO pay

Ingolf Dittmann

doi:10.1016/j.jcorpfin.2011.04.007

Restricting CEO pay

2011-09-01

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DOI：10.1016/j.jcorpfin.2011.04.007

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We analyze several proposals to restrict CEO compensation and calibrate two models of executive compensation that describe how firms would react to different types of restrictions. We find that many restrictions would have unintended consequences. Restrictions on total realized (ex-post) payouts lead to higher average compensation, higher rewards for mediocre performance, lower risk-taking incentives, and the fact that some CEOs would be better off with a restriction than without it. Restrictions on total ex-ante pay lead to a reduction in the firm's demand for CEO talent and effort. Restrictions on particular pay components, and especially on cash payouts, can be easily circumvented. While restrictions on option pay lead to lower risk-taking incentives, restrictions on incentive pay (stock and options) result in higher risk-taking incentives. (C) 2011 Elsevier B.V. All rights reserved.

Keyword:

Executive compensation

Caps on pay

Loss aversion

Restricting CEO pay

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