Authority of top executives and legal institutions

We examine whether legal institutions affect the balance of power between CEOs and shareholders. Particularly, we test to which extent legal rules matter for the extent to which CEOs receive generous pay packages. The study uses a world-widedata set covering 27 countries for the period 1995 to 2005. We consider the total level of CEO compensation and the relative importance of performance-based pay components. While performance-based CEO pay is statistically unrelated to therules we consider, the total level of CEO pay is strongly and negatively related to the degree of legal shareholder protection. This result persists once we control for the presence of institutional shareholders and capital market integration. We interpret our finding in the sense that shareholder protection confers authority to the board that oversees and controls the management, thereby limiting the generosity of thepay scheme. Our results have important implications for explaining different crosscountry corporate behavior and for the effectiveness of governmental vs. private governance.