The author would like to thank John Doukas (the Editor), an anonymous referee, Sandro Brusco, Marco Celentani, María Gutiérrez, Maria-Teresa Marchica, Ravi Singh, Daniel Wolfenzon, and seminar participants at the 2007 EFMA Symposium on Corporate Governance and Shareholder Activism, the Econometric Society 2006 European Meetings, the 2005 SAET Conference, and Universidad Carlos III for helpful comments. The usual disclaimer applies. The financial support of Spain's Ministry of Education and Science (SEJ2005-06655/ECON), Madrid's Autonomous Region (CCG06-UC3M) and the BBVA Foundation is gratefully acknowledged.
Corporate Governance When Managers Set Their Own Pay
Version of Record online: 13 OCT 2008
© 2008 The Author Journal compilation © 2008 Blackwell Publishing Ltd
European Financial Management
Volume 14, Issue 5, pages 921–943, November 2008
How to Cite
Ruiz-Verdú, P. (2008), Corporate Governance When Managers Set Their Own Pay. European Financial Management, 14: 921–943. doi: 10.1111/j.1468-036X.2008.00465.x
- Issue online: 13 OCT 2008
- Version of Record online: 13 OCT 2008
- Executive compensation;
- corporate governance;
- shareholder power;
- managerial power
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 main questions. How does shareholder power affect managers' compensation and their incentives to maximise firm value? And what is the optimal level of shareholder power? Expectedly, the model shows that increasing shareholder power leads to lower managerial pay. Greater shareholder power, however, also weakens the manager's incentives to maximise value and may even lead to lower profits for shareholders. There might, thus, be too much, as well as too little, shareholder power. The model characterises the optimal level of shareholder power and yields predictions about the relation between shareholder power, managerial pay, performance and firm characteristics.