Academics believe that shareholder and management interests can be productively aligned by directly linking CEO compensation to firm performance (Abowd , Agrawal & Mankelder , Lewellen, Loderer & Martin , and Haugen & Senbet ). Stockholders prefer CEOs pursuing strategies that maximise risk adjusted stock returns, but CEOs are assumed to be interested in strategies that maximise their personal wealth. If rewarded through their pay packages to increase the size of the firm, CEOs may overgrow the firm at shareholder expense to reach that end.
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