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Keywords:

  • Chief executive officer power;
  • Pay for performance sensitivity;
  • Firm performance;
  • Institutional investor concentration
  • G30;
  • G34;
  • J33;
  • L25;
  • M52;
  • G32

Abstract

This paper focuses on abnormal chief executive officer (CEO) structural power over top executives and examines its impacts on CEO pay for performance sensitivity and firm performance. We find that greater abnormal power is associated with weaker firm performance, but the relation is significant only when monitoring by external shareholders is weak. We also identify a channel through which the power adversely impacts firm performance: CEOs’ capture of the compensation process. Greater abnormal CEO power lowers CEOs’ pay for performance sensitivity, but again the relation is driven by observations under weak external monitoring. External monitoring is measured by institutional ownership concentration; the abnormal power, by residuals of a regression relating CEO structural power to its likely determinants. The negative impact of the abnormal power on firm performance is robust to potential reverse causality.