Year: 2025
Type: article
Abstract: We propose a model of corporate governance that characterizes the optimal managerial compensation scheme when the board of directors can monitor by auditing. The results reveal a significant substitution effect such that when monitoring is sufficiently weak, the optimal compensation depends on performance, but as it grows stronger, the incentive power of compensation declines. When monitoring is sufficiently strong, however, the compensation gives the manager full insurance. These properties are consistent with the reduction in executive pay‐performance sensitivity observed after U.S. regulatory reforms aimed at improving corporate internal control.
Source: International Review of Finance
DOI: 10.1111/irfi.70019
Author: Gino Loyola
Institution: University of Chile
Language: English
Subfield: Accounting
Domain: Social Sciences
Open Access status: bronze
OpenAlex ID: W4409829971