The Manager’s Share

It is sometimes argued in the corporate governance literature that the total share of corporate value that can be extracted by a manager is fixed and independent of the avenues through which value is extracted. Shareholders need not worry about an activity such as insider trading, the story goes, because any profits achieved by a manager through insider trading will simply offset conventional compensation. This article challenges that idea and argues that whether one views the manager’s share as being capped by external market forces, set by an optimal principal/agent contract, or limited by saliency and outrage in accordance with a managerial power view of corporate governance, the total value that can and will be appropriated by managers will be a function of the number and type of avenues through which value can be appropriated. Although analysis of each of the corporate governance mechanisms results in the same directional prediction, the magnitude of the impact of expanding channels of appropriation depends on which mechanism dominates. For example, potential avenues of appropriation that are easily monitored and under the unilateral control of the directors, such as bonuses or perks, should have little effect on incremental appropriation under an optimal contracting model, but could have significant impact under a managerial power model. A review of the relevant empirical literature suggests that additional avenues of appropriation do indeed lead to greater overall appropriation. The evidence, moreover, is largely inconsistent with the optimal contracting view. This analysis highlights a largely overlooked cost of compensation complexity: In all likelihood, the increasing complexity and opacity of executive compensation over the last two decades has contributed directly to the overall increase in managerial appropriation. * Associate Professor, Boston University School of Law. I have benefited from the valuable suggestions of Lucian Bebchuk, Keith Hylton, Steve Marks, Mike Meurer and participants in workshops at Harvard Law School and Boston University School of Law. I thank Sumangali Krishnan and Mark Gauthier for excellent research assistance. 7/14/2005 THE MANAGER’S SHARE 2