The role of the executive pay cap: Evidence from korea*

Korean firms are required to obtain shareholder approval on their executive pay cap—the maximum possible amount of total compensation for all executives. This paper investigates the efficacy of the executive pay cap requirement by analyzing the determinants and implications of the executive pay cap of Korean firms. We document that the executive pay cap is not a boilerplate figure and is associated with corporate governance and economic factors. We find that the executive pay cap is adjusted according to changes in firm performance and that a significant portion of sample firms revise their executive pay cap downwards. However, we only observe this phenomenon when foreign ownership is high, largest shareholders’ ownership.