Do Powerful CEOs Influence Compensation Contract Design?



We test the three tenets that underpin managerial power theory; namely outrage, power and camouflage, and assess the implications for compensation contract design. Our results, based on a sample of 220 U.K.-listed firms, provide an alternative explanation for compensation design choices. We examine one component of CEO pay, namely the use of performancevested stock option (PVSO) plans and find that powerful CEOs (or firms with weak boards) adopt PVSO plans early and are more likely to do so when faced with public outrage over executive compensation. Thus while mitigating agency problems is one rationale to explain compensation choices our findings provide an additional factor that adds to our understanding of the determinants of these choices.