Get MANAGERIAL POWER AND RENT EXTRACTION

The managerial power approach Under this approach, executive compensation is viewed not only as an instrument for addressing agency problems, but also as a part of the agency problem itself. One important building block of the managerial power approach is that of “outrage” costs and constraints.

Managerial power theory argues that executive compensation is often excessive when compared against a hypothetical, economically efficient compensation contract. The theory also argues that executive pay does not correlate to performance. In other words, high earners are not necessarily high performers.

The managerial power hypothesis is empirically not testable. The managerial power approach: Is it testable? - SpringerLink Springer https://link.springer.com › article Springer https://link.springer.com › article

There are six power bases managers can acquire, maintain, and use appropriately to achieve desired results. These bases are coercive, reward, legitimate, information, expert, and referent. The first four are called position powers and remaining two are called personal powers. Managerial Power | SpringerLink springer.com https://link.springer.com › ... springer.com https://link.springer.com › ...

Under the optimal contracting approach, inducing the executive to take and retain a position only provides a lower bound on compensation. A firm cannot pay less than the executive's reservation value, but it might wish to pay more in order to provide better incentives.