CEO compensation, change and corporate strategy

Dow, J and Raposo, C (2005) CEO compensation, change and corporate strategy. Working Paper. London Business School IFA Working Paper.

Abstract

CEO compensation can influence the kinds of strategies that firms adopt. We argue that performancerelated 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.