Abstract We study,how,CEO compensation,can,influence,the kinds of strate- gies that firms adopt. With performance-related compensation, CEO’s might have a tendency to look for overly ambitious, hard to implement, strategies. They do so in order to boost their own compensation, and not necessarily shareholder,value. At a cost, shareholders can curb this tendency for excessively dramatic strategy choice, by pre-commiting to a regime of CEO overcompensation in highly changeable,environments. Another,way,to avoid overambition,would,be to adopt,a regime of com- mitment to low pay. This however might be infeasible with renegotiation, and,highly costly if there are alternative value-increasing strategies. JEL numbers : G30, G34, J33, D8. Keywords: agency theory, executive compensation, strategic change. “We have created a cult of leadership that far exceeds anything that existed decades ago... What we are getting now, very danger- ously, is what I call a dramatic style of managing; the great merger, the great downsizing, the massive brilliant new strategy... So we get all these massive mergers, fire, brimstone and drama, because you can’t say to the stock analysts, ‘we’re getting our logistics all straightened out, we’re going to be much more efficient at through- put to the customer.’ They start to yawn.” (Mintzberg (2000)) Supported,by the EU-TMR Research Network,Contract FMRX-CT960054. We thank,the
Published in 2003.