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
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
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