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When less is more: The benefit of limits on executive pay
Review of Financial Studies (2015)
  • Peter Cebon, Melbourne Business School
  • Benjamin Hermalin, University of California - Berkeley

We derive conditions under which limits on executive compensation can enhance efficiency and benefit shareholders (but not executives). Having their 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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Peter Cebon and Benjamin Hermalin. "When less is more: The benefit of limits on executive pay" Review of Financial Studies (2015)
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