This paper summarizes the empirical and theoretical research on executive compensation and provides a comprehensive and up-to-date description of pay practices (and trends in pay practices) for chief executive officers (CEOs). Topics discussed include the level and structure of CEO pay (including detailed analyses of annual bonus plans, executive stock options, and option valuation), international pay differences, the pay-setting process, the relation between CEO pay and firm performance (“pay-performance sensitivities”), the relation between sensitivities and subsequent firm performance, relative performance evaluation, executive turnover, and the politics of CEO pay.

This paper develops a model in which the effectiveness of the board's monitoring of the CEO depends on the board's structure or composition. The independence of new directors is determined through a bargaining process between the existing directors and the CEO. The CEO's bargaining position, and thus his influence over the board-selection process, depends on an updated estimate of the CEO's ability based on his prior performance. Many empirical findings about board structure and performance arise as equilibrium phenomena in this model. We also explore the implications of this model for proposed regulations of corporate governance structures.

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We report evidence on chief executive officer ~CEO! turnover during the 1971 to 1994 period. We find that the nature of CEO turnover activity has changed over time. The frequencies of forced CEO turnover and outside succession both increased. However, the relation between the likelihood of forced CEO turnover and firm performance did not change significantly from the beginning to the end of the period we examine, despite substantial changes in internal governance mechanisms. The evidence also indicates that changes in the intensity of the takeover market are not associated with changes in the sensitivity of CEO turnover to firm performance. STOCKHOLDERS RELY ON INTERNAL AND EXTERNAL monitoring mechanisms to help resolve agency problems that arise from the separation of ownership and control in modern corporations. Boards of directors and blockholders are important internal control mechanisms whereas the takeover market is a major source of external control. Both academicians and practitioners have

Abstract: We examine CEO turnover and firm financial performance. Accounting measures of performance relative to other firms deteriorate prior to turnover, and improve subsequently. Relative performance improvements are positively related to institutional shareholdings and are greater when successor CEOs are hired from outside the firm than when they are insiders. We find also that turnover announcements are associated with significantly positive average abnormal stock returns. Moreover, turnover announcement abnormal stock returns are significantly positively related to subsequent changes in accounting measures of performance. This suggests that investors typically view turnover announcements as good news because they anticipate that turnover will prompt performance improvements, on average.

In Sweden, a bankruptcy filing automatically terminates CEO employment and places the firm in an open auction. This has prompted warnings of strong shareholder risk-shifting incentives to delay filing (”go for broke”). However, during severe distress, equity incentives are weak while CEO incentives to preserve private benefits of control are strong. We show that the CEO may temporarily override risk-shifting incentives, even if she owns a substantial proportion of the firm’s equity. Depending on the available investment opportunities, such managerial conservatism may result in firm-value maximizing behavior. Examining Swedish bankruptcies, we find that proxies for CEO control benefits as well as managerial quality are significant determinants of the dramatic CEO wage loss from filing, and of the probability of the CEO being rehired by the buyer in the auction. The expected value of private control benefits increases in the CEO’s quality reputation (through the rehiring decision), alleviating to some extent concerns with entrenchment. We also find that firms sold as going concerns generate a post-bankruptcy operating profitability at par with industry rivals.

ibrant public securities markets rely on complex systems of supporting institutions that promote the governance of publicly traded companies. Corporate governance structures serve: 1) to ensure that minority shareholders receive reliable

We consider a “managerial optimal” framework for top executive compensation, where top management sets their own compensation subject to limited entrenchment, instead of the conventional setting where such compensation is set by a board that maximizes firm value. Top management would like to pay themselves as much as possible, but are constrained by the need to ensure sufficient efficiency to avoid a replacement. Shareholders can remove a manager, but only at a cost, and will therefore only do so if the anticipated future value of the manager (given by anticipated future performance net future compensation) falls short of that of a replacement by this replacement cost. In this setting, observable compensation (salary) and hidden compensation (perks, pet projects, pensions, etc.) serve different roles for management and have different costs, and both are used in equilibrium. We examine the relationship between observable and hidden compensation and other variable in a dynamic model, and derive a number of unique predictions regarding these two types of pay. We then test these implications and find results that generally support the predictions of our model.

Firms that maintain no formal record of actions and events would hardly be considered well managed. Yet, organizations that require the recording of actions and the filing of reports are often labelled "bureaucratic" and ine#cient. This paper argues that the thin line between e#cient management practices and ine#cient bureaucracy is crossed to curb managerial agency costs in a multi-layer hierarchy. The model predicts that bureaucracy increases with the frequency of managerial turnover, and it establishes a link between bureaucracy, incentive schemes, and leverage in a cross-section of firms.