The Harvard Law School Forum on Corporate Governance https://corpgov.law.harvard.edu The leading online blog in the fields of corporate governance and financial regulation. Sat, 04 Apr 2026 11:30:51 +0000 en-US hourly 1 https://wordpress.org/?v=6.5.8 https://corpgov.law.harvard.edu/wp-content/uploads/2024/02/cropped-photography-4-e1706898544564-1-32x32.png Too Much, Too Soon, for Too Long: The Hidden Cost of Competitive CEO Pay – The Harvard Law School Forum on Corporate Governance https://corpgov.law.harvard.edu 32 32 Too Much, Too Soon, for Too Long: The Hidden Cost of Competitive CEO Pay https://corpgov.law.harvard.edu/2025/12/17/too-much-too-soon-for-too-long-the-hidden-cost-of-competitive-ceo-pay/?utm_source=rss&utm_medium=rss&utm_campaign=too-much-too-soon-for-too-long-the-hidden-cost-of-competitive-ceo-pay https://corpgov.law.harvard.edu/2025/12/17/too-much-too-soon-for-too-long-the-hidden-cost-of-competitive-ceo-pay/#respond Wed, 17 Dec 2025 12:31:10 +0000 https://corpgov.law.harvard.edu/?p=178421?d=20251216160543EST Posted by Gilles Chemla (Imperial College), Alejandro Rivera (UT-Dallas), and Liyan Shi (Carnegie Mellon University), on Wednesday, December 17, 2025
Editor's Note:

Gilles Chemla is a Professor of Finance at Imperial College, Alejandro Rivera is an Associate Professor of Finance at UT-Dallas, and Liyan Shi is the Shubham Singhal and Jenny Cordina Assistant Professor of Economics at Carnegie Mellon University. This post is based on their recent article, forthcoming in the Journal of Finance.

Executive compensation remains one of the most contentious topics in finance. The debate is usually polarized between two views. On one side, the “shareholder view” argues that high pay is an efficient market outcome—the necessary price for scarce talent in a competitive world. On the other side, the “managerial power view” argues that high pay is the result of rent extraction by entrenched CEOs taking advantage of weak boards.

In our recent paper, Too Much, Too Soon, for Too Long: The Dynamics of Competitive Executive Compensation (Journal of Finance, 2025), we propose a novel perspective. We show that even when boards are perfectly independent and markets are perfectly competitive, the equilibrium CEO compensation package is inefficient.

Specifically, we find that in a competitive market, executives are paid too much, receive their pay too soon, and keep their jobs for too long relative to what is socially optimal.

The Mechanism: Externalities through Outside Options

Why does competition lead to inefficiency? The answer lies in pecuniary externalities, the ripple effects that one firm’s contract choices have on the wider labor market via the outside options available to corporate executives. (more…)

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