Restricting CEO Pay ∗

We analyze several proposals to restrict CEO compensation and calibrate two models of executive compensation that describe how rms would react to dierent types of restrictions. We nd that many restrictions would have unintended consequences. Restrictions on total realized (ex-post) payouts lead to higher average compensation, higher rewards for mediocre performance, lower risk-taking incentives, and the fact that some CEOs would be better o with a restriction than without it. Restrictions on total ex-ante pay lead to a reduction in the rm's demand for CEO talent and eort. Our model predicts an average reduction in rm value of 0.65% when total pay is reduced by 20%. Restrictions on particular pay components, and especially on cash payouts, can be easily circumvented. While restrictions on option pay lead to lower risk-taking incentives, restrictions on incentive pay (stock and options) result in higher risk-taking incentives.