On CEO Appointment and Compensation
41 Pages Posted: 22 Oct 2010
There are 2 versions of this paper
Internal vs External CEO Choice and the Structure of Compensation Contracts
Date Written: May 2010
Abstract
CEO compensation has received a lot of attention in the recent past, above all the widening gap between its level and that of the compensation of other employees. However, this increase in CEO pay was accompanied by changes in the structure of CEO pay (i.e., the increased use of stock options) and changes in CEO appointment (boards of directors choosing CEOs outside the firm rather than inside). In this article, we propose a amended version of the standard principal-agent model that provides a rationale for the simultaneous increases in (i) CEO pay, (ii) use of stock options in compensation schemes and (iii) hiring of CEOs externally. Furthermore, we derive new testable implications regarding compensation packages proposed to internally promoted and externally chosen CEOs.
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