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

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  • SHIVARAM RAJGOPAL
  • TERRY SHEVLIN
  • VALENTINA ZAMORA
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    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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    Bibliographic 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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    Cited by:
    1. RĂ¼diger Fahlenbrach, 2009. "Shareholder Rights, Boards, and CEO Compensation," Review of Finance, European Finance Association, vol. 13(1), pages 81-113.
    2. Giannetti, Mariassunta, 2011. "Serial CEO incentives and the structure of managerial contracts," Journal of Financial Intermediation, Elsevier, vol. 20(4), pages 633-662, October.
    3. Albuquerque, Ana M. & De Franco, Gus & Verdi, Rodrigo S., 2013. "Peer choice in CEO compensation," Journal of Financial Economics, Elsevier, vol. 108(1), pages 160-181.
    4. Pierre Chaigneau & Nicolas Sahuguet, . "The structure of CEO pay: pay-for-luck and stock-options," FMG Discussion Papers dp713, Financial Markets Group.
    5. Pierre Chaigneau & Nicolas Sahuguet, 2013. "The effect of monitoring on CEO pay practices in a matching equilibrium," LSE Research Online Documents on Economics 55405, London School of Economics and Political Science, LSE Library.
    6. Antoinette Rijsenbilt & Harry Commandeur, 2013. "Narcissus Enters the Courtroom: CEO Narcissism and Fraud," Journal of Business Ethics, Springer, vol. 117(2), pages 413-429, October.
    7. Antonio Falato & Dalida Kadyrzhanova, 2012. "CEO successions and firm performance in the US financial industry," Finance and Economics Discussion Series 2012-79, Board of Governors of the Federal Reserve System (U.S.).
    8. 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.
    9. James Bannister & Harry Newman & Joseph Weintrop, 2011. "Tests for relative performance evaluation based on assumptions derived from proxy statement disclosures," Review of Quantitative Finance and Accounting, Springer, vol. 37(2), pages 127-148, August.
    10. Brookman, Jeffrey T. & Thistle, Paul D., 2013. "Managerial compensation: Luck, skill or labor markets?," Journal of Corporate Finance, Elsevier, vol. 21(C), pages 252-268.
    11. Jiang, Zhan & Kim, Kenneth A. & Zhang, Hao, 2014. "The effects of corporate bailout on firm performance: International evidence," Journal of Banking & Finance, Elsevier, vol. 43(C), pages 78-96.
    12. Francis, Bill & Hasan, Iftekhar & John, Kose & Sharma, Zenu, 2013. "Asymmetric benchmarking of pay in firms," Journal of Corporate Finance, Elsevier, vol. 23(C), pages 39-53.
    13. Pierre Chaigneau & Nicolas Sahuguet, 2014. "Explaining the Association between Monitoring and Controversial CEO Pay Practices: an Optimal Contracting Perspective," Cahiers de recherche 1406, CIRPEE.
    14. 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.

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