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Corporate Governance and the Division of Rents among Shareholders, Managers and Employees

This paper investigates the relationship between corporate governance, managerial behavior and wages. To do so, it develops a model in which control is delegated to the manager by owners, who exercise their control rights only if their return falls below a threshold value determined by the firm’s governance structure. The model shows that improving owners’ ability to exercise their control rights will generally lead to lower managerial and nonmanagerial compensation. It may, however, also lead the manager to make inecient choices. Increasing the manager’s ownership stake will generally have opposite eects, leading to more ecient