CEO compensation

8 important questions on CEO compensation

What is the conclusion of the article ‘Are financial incentives related to performance? A meta-analytic review of empirical research’?

Financial incentives were not related to performance quality, they were related to performance quantity

What is the crowding out effect when direct incentives are present?

A crowding-out of intrinsic motivation occurs because incentives become the more salient factor to performance.

What are gaming behaviors

These are behaviors that are shown after a new incentive is introduced and people try to find loopholes to meet the incentive to get a reward.
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What is the Arm’s-length contracting hypothesis?

CEO compensation is dependent on contracting between executives attempting to get the best possible deal for all parties involved.

What is board independence?

Boards should be composed of independent directors, who are not sensitive to the influence of corporate insiders and free of conflicts of interests

In which 5 situations is the board independence not held?

1. Incentives to be re-elected
2. CEO’s power to benefit directors (through board compensation)
3. Friendship and loyalty
4. Collegiality and authority
5. Cognitive dissonance and solidarity

What is the managerial power hypothesis?

Executives who have more power should receive higher pay- or pay that is less sensitive to performance- than their less successful counterparts because they are able to more effectively influence the board in the negotiations on executive compensation.

The paper “Assessing managerial power theory: a meta-analytical approach to understanding the determinants of CEO compensation” looked into the effect of indicators of managerial power on the compensation a CEO gets and on the manner in which CEOs are able to re-negotiate performance-pay, because this type of pay is not in the interest of CEOs. These indicators of power were:

- CEO duality: whether the CEO is also the chairman of the board of directors.
- CEO tenure: number of years the executive has been CEO
- Board size: total number of directors who serve on the board
- Board independence: degree to which the board of directors operate independently from insiders
- Ownership concentration: extent to which outstanding stock is in the hands of large blockholders
- Institutional ownership: whether the owner is an institutional investor

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