Research Handbooks in Corporate Law and Governance series
Edited by Randall S. Thomas and Jennifer G. Hill
Salim Chahine and Marc Goergen 1 INTRODUCTION “Pay without performance”, “rent appropriation”, or pay “under the radar”. Despite the economic crisis and significant collective pay cuts, the chief executives of the 500 biggest companies in the US received an average $8 million per head in 2009.1 Over the last two or three decades, the compensation of executives and in particular CEOs of mature firms has been the subject of a debate fuelled by corporate-governance activists and academics. As a result, there is now a substantial body of research on the determinants of executive compensation and its association with firm performance. Several studies have linked the design of executive compensation to organizational and institutional characteristics (see e.g. Balkin and Gomez-Mejia, 1987). More recently, developments of the principal–agent theory have examined the motivation behind and the incentives created by executive compensation from a behavioral perspective. Specifically, agency problems might occur from the divergence of interests between the agent (the CEO, i.e. the decision-maker) and the principal (the shareholders, the riskbearers) resulting in the former taking advantage of the latter. However, despite extensive research on CEO compensation in mature firms, as yet little attention has been given to the role and design of executive pay in firms going public. An initial public offering (IPO) is a cornerstone in the life of a corporation and is characterized by information asymmetries between the management and outside investors and thus potentially substantial agency problems. The IPO consists of the first public offer of the company’s...
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