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CEOs' Outside Employment Opportunities and the Lack of Relative Performance Evaluation in Compensation Contracts

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Author Info
SHIVARAM RAJGOPAL
TERRY SHEVLIN
VALENTINA ZAMORA
Abstract

Although agency theory suggests that firms should index executive compensation to remove market-wide effects (i.e., RPE), there is little evidence to support this theory. Oyer (2004, "Journal of Finance" 59, 1619-1649) posits that an absence of RPE is optimal if the CEO's reservation wages from outside employment opportunities vary with the economy's fortunes. We directly test and find support for Oyer's (2004) theory. We argue that the CEO's outside opportunities depend on his talent, as proxied by the CEO's financial press visibility and his firm's industry-adjusted ROA. Our results are robust to alternate explanations such as managerial skimming, oligopoly, and asymmetric benchmarking. Copyright 2006 by The American Finance Association.

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File URL: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1540-6261.2006.00890.x
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Publisher Info
Article provided by American Finance Association in its journal The Journal of Finance.

Volume (Year): 61 (2006)
Issue (Month): 4 (08)
Pages: 1813-1844
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Handle: RePEc:bla:jfinan:v:61:y:2006:i:4:p:1813-1844

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  1. Olubunmi Faleye, 2007. "Does one hat fit all? The case of corporate leadership structure," Journal of Management and Governance, Springer, vol. 11(3), pages 239-259, September. [Downloadable!] (restricted)
  2. Giannetti, Mariassunta, 2007. "Serial CEO Incentives and the Structure of Managerial Contracts," CEPR Discussion Papers 6422, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  3. Fahlenbrach, Rudiger & Minton, Bernadette A. & Pan, Carrie H., 2007. "The Market for Comeback CEOs," Working Paper Series 2007-4, Ohio State University, Charles A. Dice Center for Research in Financial Economics. [Downloadable!]
  4. Fahlenbrach, Rudiger, 2008. "Shareholder Rights, Boards, and CEO Compensation," Working Paper Series 2008-5, Ohio State University, Charles A. Dice Center for Research in Financial Economics. [Downloadable!]
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