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When Less Is More: The Benefits of Limits on Executive Pay
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https://doi.org/10.1093/rfs/hhu140Abstract
We derive conditions under which limits on executive compensation can enhance efficiency and benefit shareholders (but not executives). Having its hands tied in the future allows a board of directors to credibly enter into relational contracts with executives that are more efficient than performance-contingent contracts. This has implications for the ideal composition of the board. The analysis also offers insights into the political economy of executive-compensation reform.
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