Journal of Finance Vol. 60 No. 6 2005

CEO Compensation, Change, and Corporate Strategy

James Dow^1,2,3; Clara C. Raposo^1,4,2,3

¹ Iscte – Instituto Universitário de Lisboa · ² American Finance Association · ³ University College London · ⁴ Kushabhau Thakre Patrakarita Avam Jansanchar University

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.

DOI

10.1111/j.1540-6261.2005.00814.x

Volume

60

Issue

6

Pages

2701-2727

Language

en

Sources

openalex bibtex:phds-export.bib crossref

Cite

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