Research: Managerial Power, Stock-Based Compensation, and Firm Performance: Theory and Evidence

Chongwoo Choe
Monash University

Gloria Yuan Tian
School of Banking and Finance

Xiangkang Yin
La Trobe University - School of Economics and Finance





February 1, 2009

Abstract:
    



This paper has two main objectives. First, we provide a simple,
theoretical analysis of how managerial power affects CEO compensation
and firm performance. Our theoretical model follows the rent extraction
view of CEO compensation put forward by the managerial power theory. To
focus on the main thesis of the managerial power theory, we restrict
our attention to one aspect of power, namely the CEO's power to
influence his own pay.

Second,
we provide empirical analyses of our theoretical findings in a unified
framework using a comprehensive data set encompassing CEO power, CEO
pay, and firm performance. Our theoretical predictions on the relation
between CEO power and CEO pay, and the relation between CEO power and
pay-performance sensitivity of CEO's stock-base compensation are
largely supported by our empirical findings for diverse measures of CEO
power. However the predicted relation between CEO power and firm
performance has mixed support: for some measures of CEO power and firm
performance, more CEO power is shown to be detrimental to outside
shareholders; for other measures, more CEO power is shown to improve
return to outside shareholders. This suggests that, while the
managerial power theory has clear relevance in explaining the relation
between power and pay, the scope of power needs to be broadened to have
better understanding of how CEO power affects firm performance.

Keywords: Managerial power, agency theory, stock-based compensation, performance

JEL Classifications: D82, G32, J33