The managerial power theory of executive pay: A cross national test and extension

Executive pay has long been analyzed from the perspective of complete contracting theory, which assumes that the corporate board contracts at arm's length with executives in order to determine their pay. Managerial power theory, in contrast, predicts that executives have discretionary powers to set their own pay arrangements. We assess the cross-national generalizability of this latter theory by testing it on a unique dataset of 1394 pay packages representing 451 firms from 17 countries. We also extend the theory by testing additional predictions on how country-level institutions further influence executives' discretion over the pay setting process.

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