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Top Management Incentives, Monitoring and Risk Bearing: A Study of Executive Compensation, Ownership & Board Structure in Initial Public Offerings
Randolph P. Beatty and Edward J. Zajac, Administrative Science Quarterly 39 (1994): 313-315


We recently completed a study designed to help us understand what gives rise to various methods adopted by IPO firms for rewarding and controlling top managers. Looking at real examples of how these firms compensate managers raised a number of questions. For instance, why do some but not all IPO firms use stock option plans? Why do some but not all IPO firms have significant outside board membership? What is the role of large blockholders and venture capitalists in controlling managerial decisions in IPOs? We argue that the answers to these questions reflect the resolution of fundamental concerns facing IPO firm managers and owners. As our research shows, pre-IPO firms exhibit quite varied compensation contracts and governance structures. One might believe that the managers and owners of most IPO firms are the same people, and so the alignment of incentives between the two groups is not an issue. But this view is contradicted by the significant variation in control mechanisms that our study reveals in pre-IPO firms.

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