"Capping CEO pay"




We review a number of proposals to restrict executive pay and analyze what effect they would have on executive compensation and managerial incentives. We calibrate a stylized principal-agent model to the individual data of 595 U.S. CEOs and find that an ex-post limitation of pay may increase the costs of CEO compensation by up to 30 percent, on average. The cap reduces payouts in good states of the world, but it results in more extreme payouts for low and intermediate outcomes. Very low caps on pay lead to CEOs earning rents and eventually to lower managerial incentives.
The Brown Bag Seminars are sponsored by ERIM.
Contact information:
Sebastian Gryglewicz