Does CEO compensation reflect managerial ability or managerial power? Evidence from the compensation of powerful CEOs

Wei-Ling Song, Kam-Ming Wan*

*Corresponding author for this work

Research output: Contribution to journalArticleScientificpeer-review

55 Citations (Scopus)

Abstract

This paper examines the relation between managerial power and compensation for Chief Executive Officers of S&P 500 companies from 1993 through 2012. We find that more-powerful CEOs earn more than less-powerful CEOs. We refer to this additional compensation as a “power premium” and investigate this power premium based on two competing views. The managerial ability view argues that the power premium compensates CEOs for their better managerial talent while the managerial power view argues that the power premium reflects the CEO's ability to extract excessive compensation. Overall, our results are more consistent with the managerial ability view. Empirically, we find that the power premium and the fraction of equity-based compensation are invariant to whether the CEO is newly hired or not. We also find that the likelihood of having an explicit employment contract is similar between new and incumbent CEOs.

Original languageEnglish
Peer-reviewed scientific journalJournal of Corporate Finance
Volume56
Pages (from-to)1-14
Number of pages14
ISSN0929-1199
DOIs
Publication statusPublished - 01.06.2019
MoE publication typeA1 Journal article - refereed

Keywords

  • 511 Economics
  • CEO compensation
  • CEO power
  • Employment contracts
  • Founder-CEO

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