Two essays on CEO compensation

The first essay examines CEO pay cuts. Understanding CEO pay cuts allows for a better overall understanding of CEO compensation policies. I provide a comprehensive analysis of the board's design of the executive compensation contract that specifies actions the board will take at different levels of corporate performance. When pressure on boards is higher or boards feel they are under greater scrutiny they are more likely to cut CEO pay. Boards cut pay to punish CEOs for poor performance as well as to signal outsiders, sometimes falsely, that CEOs are being effectively monitored. The second essay examines long-term alignment of CEO pay and firm performance. Many studies examine the general association between CEO wealth and shareholder wealth. These studies do not make clear however if changes in CEO wealth and changes in shareholder wealth are well aligned, in general or for various levels of performance. Single period compensation designs are inherently flawed because alignment of pay and performance in periods when shareholder wealth decreases is not possible. The multi-period model presented in this paper has the advantage of considering aggregate performance over the tenure of the CEO. The key to this alternative compensation design is the holding back of some portion of CEO pay. That is to not pay the CEO the complete sum of pay justified by performance. This will allow the board to later penalize the CEO by not distributing previously held back pay. I present, and find support for, a number of hypotheses supporting the use of the holdback compensation policy.