The CEO pay slice: Managerial power or efficient contracting? Some indirect evidence

This paper uses the CEO Pay Slice (CPS) to provide insight into the managerial power versus efficient contracting debate on CEO compensation. Based on a sample of 9978 U.S. listed firms for the period 2001-2010 our evidence is inconsistent with managerial power. For instance, we find that the CPS of a newly appointed CEO does not differ to that of the outgoing CEO and also does not increase over time. Furthermore, we find no relation between the CPS and subsequent firm performance, or between a measure of excess CPS and subsequent firm performance. In addition, we show that most firms are quick to reduce excess CPS levels. However, for a small subsample in which excessive CPS persists, we observe a negative relation between CPS and subsequent firm performance. Overall our evidence is largely consistent with an efficient contracting explanation of CEO compensation as opposed to a managerial power explanation.