CEO Compensation, Change, and Corporate Strategy

  • Author(s): JAMES DOW, CLARA C. RAPOSO
  • Published: Nov 10, 2005
  • Pages: 2701-2727
  • DOI: 10.1111/j.1540-6261.2005.00814.x

ABSTRACT

CEO compensation can influence the kinds of strategies that firms adopt. We argue that performance‐related compensation creates an incentive to look for overly ambitious, hard to implement strategies. At a cost, shareholders can curb this tendency by precommitting to a regime of CEO overcompensation in highly changeable environments. Alternatively shareholders can commit to low CEO pay, although this requires a commitment mechanism (either by the board of the individual company, or by the society as a whole) to counter the incentive to renegotiate upwards. We study the conditions under which the different policies for CEO compensation are preferred by shareholders.

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