The Effect of Monitoring on CEO Compensation in a Matching Equilibrium

Chaigneau, Pierre; Sahuguet, Nicolas

doi:10.2139/ssrn.1944048

Download This Paper

Open PDF in Browser

Add Paper to My Library

The Effect of Monitoring on CEO Compensation in a Matching Equilibrium

Paris December 2011 Finance Meeting EUROFIDAI - AFFI

45 Pages Posted: 14 Oct 2011 Last revised: 4 Jul 2017

See all articles by Pierre Chaigneau

Nicolas Sahuguet

HEC Montreal - Institute of Applied Economics

Date Written: July 1, 2016

Abstract

We consider a model of CEO selection, dismissal and retention. Firms with larger blockholder ownership monitor more; they get more information about CEO ability, which facilitates the dismissal of low-ability CEOs. These firms are matched with CEOs whose ability is more uncertain. For retention purposes, the compensation of these CEOs is more sensitive to firm value, and relatively less sensitive to business conditions. Moreover, these CEOs receive lower salaries when CEOs skills are sufficiently transferable. A diffusion of best monitoring practices increases competition for CEOs and raises CEO pay in all firms, including those with unchanged monitoring ability.

Keywords: CEO compensation, CEO retention, corporate governance, monitoring, ownership structure

JEL Classification: D86, G34, M12

Suggested Citation: Suggested Citation

Chaigneau, Pierre and Sahuguet, Nicolas, The Effect of Monitoring on CEO Compensation in a Matching Equilibrium (July 1, 2016). Paris December 2011 Finance Meeting EUROFIDAI - AFFI, Available at SSRN: https://ssrn.com/abstract=1944048 or http://dx.doi.org/10.2139/ssrn.1944048