Explicit Employment Contracts and CEO Compensation
55 Pages Posted: 26 Oct 2014 Last revised: 30 Oct 2014
Date Written: October 8, 2014
Abstract
This study investigates the relation between the use of explicit employment agreements (EA) and CEO compensation. Overall, our findings are broadly consistent with the predictions of Klein, Crawford, and Alchian (1978) that an EA is used to induce CEOs to make firm-specific human capital investments that are vulnerable to opportunistic behavior. We determine that compensation is higher when CEOs have employment agreements that are written, longer in duration, or more explicit in terms. Additionally, such employment agreements are more likely to occur when firms have (i) externally hired CEOs, (ii) CEOs with large abnormal compensation, (iii) low investment intensity, (iv) low growth opportunities, and (v) CEOs with a short employment history with the firm.
Keywords: Employment Contracts, CEO Compensation, Contract Explicitness
JEL Classification: G34, G38, J31, J33
Suggested Citation: Suggested Citation