December - 2019
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Zsolt Bihary

Zsolt Bihary

is an Associate Professor of the Department of Finance at Corvinus University of Budapest (CUB). Previously he worked as a researcher in physical chemistry, and as a financial modeler at Morgan Stanley. His research interest focuses on portfolio optimization, evolutionary finance and financial networks.

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Zsolt Bihary, Péter Csóka, Péter Kerényi, Alexander Szimayer: Managerial Power and Say-on-Pay in a Principal Agent Framework

We study a continuous time principal agent model with two non-standard features. First, the agent has managerial power restricting the principal’s set of strategies. Second, the agent uses realized past pay as reference point for demanded future pay also addressing pay for luck. Additionally, we include the principal’s say-on-pay, that is, the ability to deny the demanded pay at the expense of a shirking agent. Our framework relates to the managerial power theory in executive compensation and the adoption of say-on-pay vote regulation in the 2000s. The model predicts that say-on-pay increases principal’s value, decreases the “outrage constraint”, that is, the natural barrier to excessive compensation arrangements, and by this is decreasing the pay of the agent in high demanded pay states. For low to medium demanded pay states, the adoption of say-on-pay can lead to a small increase in the overall pay with the structure shifting towards a higher proportion of incentive dependent salary components.

Last modified: 2019.10.15.