Journal Title
Title of Journal: OR Spectrum
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Publisher
Springer-Verlag
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Authors: Thorsten Döscher Gunther Friedl
Publish Date: 2010/06/23
Volume: 33, Issue: 2, Pages: 309-331
Abstract
Excessive executive compensation is one of the prevailing topics in the business press The “managerial power approach” which is at the center of numerous publications of Bebchuk and Fried Pay without performance the unfulfilled promise of executive compensation Harvard University Press Cambridge 2004 and Bebchuk and Grinstein Oxford Rev Econ Policy 21283–303 2005 claims that chief executive officers CEOs corrupt the paysetting process by influencing the board of directors This paper analyzes the role of the board of directors in the paysetting process for the CEO’s compensation schedule in an optimal contracting framework The board’s role in our model is to provide information about the CEO’s ability to the shareholders We assume that the CEO and other stakeholders such as employees’ representatives can influence the board to act in their respective favor when reporting to the shareholders We show how the CEO’s influence on the board alters the optimal contract and the CEO’s incentives Most interestingly the influence of an interest group on the board can be the reason for high pay schedules even though that was not the objective of the interest group
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