When Less Is More: The Benefits of Limits on Executive Pay

Peter Cebon; Benjamin E. Hermalin

doi:10.1093/rfs/hhu140

When Less Is More: The Benefits of Limits on Executive Pay

Peter Cebon¹; Benjamin E. Hermalin²

¹ Melbourne Business School, University of Melbourne · ² Haas School of Business & Department of Economics, University of California

Review of Financial Studies 2015 open access

We derive conditions under which limits on executive compensation can enhance efficiency and benefit shareholders (but not executives). Having its hands tied in the future allows a board of directors to credibly enter into relational contracts with executives that are more efficient than performance-contingent contracts. This has implications for the ideal composition of the board. The analysis also offers insights into the political economy of executive-compensation reform.

DOI: 10.1093/rfs/hhu140
Volume: 28 (6)
Pages: 1667-1700
Language: en
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