Year: 2005
Type: report
Abstract: The CEO’s control over information in the boardroom limits the board’s ability to monitor the CEO. We examine how CEOs ’ incentives to hide negative information from the board depend on their compensation structure, and how the board can structure CEO compensation optimally to mitigate the problem. The optimal compensation package consists of options and severance pay. Option pay forces the CEO “to put his money where his mouth is” by making it as costly as possible for him to falsely assert that the firm’s future under his continuing leadership is good. This minimizes the amount of severance pay needed to compensate the CEO for being fired, thus minimizing his rents. The model suggests how deregulation and technological changes in the 1980s and 1990s may have contributed to the dramatic increase in both CEO pay and forced turnover over the same period.
Authors: Roman Inderst, Holger M. Mueller
Language: English
Subfield: Accounting
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W3122711153