Explicit Employment Contracts and CEO Compensation

55 Pages Posted: 26 Oct 2014 Last revised: 30 Oct 2014

See all articles by Wei-Ling Song

Wei-Ling Song

Louisiana State University

Kam-Ming Wan

Hanken School of Economics

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

Song, Wei-Ling and Wan, Kam-Ming, Explicit Employment Contracts and CEO Compensation (October 8, 2014). Available at SSRN: https://ssrn.com/abstract=2514823 or http://dx.doi.org/10.2139/ssrn.2514823

Wei-Ling Song

Louisiana State University ( email )

Baton Rouge, LA 70803
United States
225-578-6258 (Phone)
225-578-6366 (Fax)

Kam-Ming Wan (Contact Author)

Hanken School of Economics ( email )

PB 287
Vaasa, Vaasa 65101
Finland

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