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Serial CEO Incentives and the Structure of Managerial Contracts

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  • Giannetti, Mariassunta

Abstract

This paper analyzes the optimal contracting consequences of a recent phenomenon in the managerial labour market, CEO job hopping. I show that if the managerial labour market is thin and firm growth opportunities are weak, the optimal contract rewards the CEO for past performance through a bonus. Nevertheless, the CEO takes a long horizon in selecting corporate strategies. If firm growth opportunities improve, but prospects of job-hopping remain limited, the optimal contract includes restricted-equity-like claims, but overall compensation does not increase. However, if the managerial labour market provides more opportunities for job-hopping, large differences in the structure and the level of managerial compensation emerge. If firm growth opportunities are weak, it is optimal to offer a bonus contract, even though the CEO selects an inefficient short-term strategy. If firm growth opportunities are strong, a large amount of long-term equity compensation mitigates short-termist incentives. This drives a surge in CEO compensation. I show that, under these conditions, the optimal contract may include non-restricted equity even though the main problem is managerial retention. Finally, I argue that the model can explain both the surge in U.S. CEO compensation and the differences in managerial compensation across countries and across firms within a country.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6422.

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Date of creation: Aug 2007
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Handle: RePEc:cpr:ceprdp:6422

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Keywords: executive compensation; managerial labour market; short-termism;

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Citations

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Cited by:
  1. Alessandra Bonfiglioli & Gino Gancia, 2009. "Growth, selection and appropriate contracts," Economics Working Papers 1345, Department of Economics and Business, Universitat Pompeu Fabra, revised Jul 2012.
  2. Pierre Chaigneau, 2010. "The Optimal Timing of Executive Compensation," FMG Discussion Papers dp660, Financial Markets Group.
  3. Custódio, Cláudia & Ferreira, Miguel A. & Matos, Pedro, 2013. "Generalists versus specialists: Lifetime work experience and chief executive officer pay," Journal of Financial Economics, Elsevier, vol. 108(2), pages 471-492.
  4. Michael L. Bognanno, 2010. "Executive Compensation: A Brief Review," DETU Working Papers 1002, Department of Economics, Temple University.
  5. Rustam, Sehrish & Rashid, Kashif & Zaman, Khalid, 2013. "The relationship between audit committees, compensation incentives and corporate audit fees in Pakistan," Economic Modelling, Elsevier, vol. 31(C), pages 697-716.
  6. Camelia M. Kuhnen & Andrea L. Eisfeldt, 2010. "CEO Turnover in a Competitive Assignment Framework," 2010 Meeting Papers 1081, Society for Economic Dynamics.
  7. Pierre Chaigneau, 2012. "The Optimal Timing of CEO Compensation," Cahiers de recherche 1207, CIRPEE.

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