CEO COMPENSATION: A RESOURCE ADVANTAGE AND

STAKEHOLDER-BARGAINING PERSPECTIVE

GURUPDESH PANDHER & RUSSELL CURRIE

DIMA LEONT’EVGROUP 322

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#2SLIDE

BACKGROUND

DISCUSSION: > STRUCTURAL SOURCES OF CORPORATE POWER [AGENCY CONFLICT] > SOCIAL INFLUENCE TACTICS «EXECUTIVE POWER» OVERPAID CEOs PRESUMABLY RECEIVE COMPENSATION IN EXCESS OF THEIR CONTRIBUTION TO THE COMPANY THE LEVEL AND COMPOSITION OF CEO PAY SHOULD DEPEND ON: > THE FIRM'S CAPACITY TO GENERATE RENTS AND VALUE > THE UNCERTAINTY OR RISKINESS OF ITS RESOURCE ADVANTAGE > THE COMPETITIVE INTERACTION BETWEEN IMPORTANT FIRM STAKEHOLDERS, SHAREHOLDERS AND TOP MANAGEMENT

CEO PAY

CORPORATE STRATEGY

FIRM CHARACTERISTICS

RESOURCE ADVANTAGE

#3 RESEARCH QUESTIONSSLIDE

STAKEHOLDER MANAGEMENT

BEHAVIORAL FACTORS

METHODOLOGY#4SLIDE

ANALYTICAL FRAMEWORK= CEO & STAKEHOLDERS+RESOURCE SURPLUS+UTILITYMAX CLAIMANTS+RELATIVE BARGAINING POWER

THE MODEL FORMALIZES THE IDEA THAT TOP MANAGEMENT AND STAKEHOLDERS COMPETE FOR FIRM RENTS BASED ON THEIR BARGAINING CLOUT

SOME BASIC ASSUMPTIONS NEED TO APPLY: > FEASIBILITY CONDITIONS: SHAREHOLDERS & CEO > CEO SALARY LIMIT [COMPENSATION>SALARY]

FEATURES OF A MODEL: > CEO’S ABILITY TO SHAPE THE SIZE OF COMPENSATION > EFFORT IS NOT A VARIABLE OF INTEREST [NOT DECISION MAKING]

#5 RESEARCH OUTCOMESSLIDE

> OPTIMAL CEO COMPENSATION AND STAKEHOLDER RENTS EQUATIONS: CASH/EQUITY/TOTAL COMPENSATION, RATIO OF EQUITY-TO-CASH COMPENSATION, OPTIMAL STAKEHOLDER RENTS

> SHAREHOLDERS & STAKEHOLDERS [REDUCING THE BARGAINING POWER OF STAKEHOLDERS WILL NOT NECESSARILY RESULT IN HIGHER RETURNS TO SHAREHOLDERS]

> FIRM CHARACTERISTICS & CEO COMPENSATION

> VARIABILITY OF CEO COMPENSATION > CORPORATE STRATEGY POLICY, RENT DISTRIBUTION AND

OFFSHORING [DOMESTIC WORKERS/SUPPLIERS ARE REPLACED BY LOWER-COST FOREIGN COUNTERPARTS]

> CEO OPTIMISM AND OVERCONFIDENCE - BIASES IN FIRM VALUE & UNCERTAINTY [CEO OPTIMISM AND OVERCONFIDENCE LEAD TO

AN INCREASE IN EQUITY PAY RELATIVE TO CASH COMPENSATION]

TOPICALITY#6

ACTORS CEOs / SHAREHOLDERS /

STAKEHOLDERS

SLIDE

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EXTENSIONS PRINCIPAL-AGENT CONTRACTING

MODELS+ALTERNATIVE FRAMEWORK / AGENCY AND

EXECUTIVE POWER LITERATURE

IMPLICATIONS CEO PAY: EQUITY, CASH & TOTAL

FURTHER RESEARCH CROSS-SECTIONAL &

LONGITUDINAL ANALYSIS / DIFFERENT CULTURES

«…ADVANCE AND FORMALIZE OUR UNDERSTANDING OF CORPORATE DECISION MAKING AND RENT DISTRIBUTION…