We examine the e ects of anti-takeover legislation on CEO pay. Since these laws altered an
important component of governance, the threat of takeover, they provide a natural testing
ground for theories of executive compensation. Under skimming models, where entrenched
CEOs pay themselves, we would expect mean pay to rise as less governed CEOs manage to
skim more. Under contracting models, where a principal optimally sets pay, we would expect
a fall (or no e ect) in mean pay since CEOs no longer need to be compensated for the risk of
takeover. We might expect, however, a rise in use of pay for performance to o set the reduced
incentives. Consistent with skimming, we nd that mean pay rose in rms a ected by the laws
(relative to a control group). Moreover, the rise in pay was largest in rms that did not have a
large shareholder present prior to the law. Turning to pay for performance, we nd evidence of
a rise in pay for performance on accounting measures. This rise, however, seems to have been
concentrated in rms with large shareholders. Together, these results suggest that rms without
large shareholders match more closely the skimming model. The optimal contracting model, on
the other hand, may have more relevance in the presence of a large shareholder who can serve
as the principal these models posit. |