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Internal versus external CEO choice and the structure of compensation contracts

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  • Palomino, Frédéric
  • Peyrache, Eloïc

Abstract

Any firm choosing a chief executive officer (CEO) faces a double problem: candidate selection and choice of a compensation scheme. We derive sufficient conditions where the unique optimal compensation scheme is a capped-bonus contract in a pure moral-hazard environment, while equity is used when the firm also faces adverse selection. Then, we provide a rationale for the simultaneous increases in CEO pay, use of equity in compensation, and external hiring of CEOs. Our results are consistent with empirical evidence that shows externally hired CEOs earn more than those internally hired and that externally hired CEOs get a higher fraction of their compensation equity based.

Suggested Citation

  • Palomino, Frédéric & Peyrache, Eloïc, 2013. "Internal versus external CEO choice and the structure of compensation contracts," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 48(4), pages 1301-1331, August.
    • Handle: RePEc:cup:jfinqa:v:48:y:2013:i:04:p:1301-1331_00
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    Cited by:

    1. Guo, Xiaohu & Gupta, Vishal K. & Jackson, William E. & Mortal, Sandra C., 2021. "Is there a racial gap in CEO compensation?," Journal of Corporate Finance, Elsevier, vol. 69(C).
    2. Tasawar Nawaz, 2022. "What's in an education? Implications of CEO education for financial inclusion," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(3), pages 3741-3753, July.
    3. Jakob Infuehr & Sebastian Kronenberger, 2023. "The Impact of Job Similarity Along the Career Path on the Firm’s Promotion Strategy," Schmalenbach Journal of Business Research, Springer, vol. 75(2), pages 149-172, June.
    4. Jongjaroenkamol, Prasart & Laux, Volker, 2017. "Insider versus outsider CEOs, executive compensation, and accounting manipulation," Journal of Accounting and Economics, Elsevier, vol. 63(2), pages 253-261.
    5. Tani, Massimiliano & Valentine, Andrew & Sharpe, Kieran, 2022. "The Gender Pay Gap in the CEOs' Labor Market," IZA Discussion Papers 15781, Institute of Labor Economics (IZA).
    6. Brockman, Paul & Lee, Hye Seung (Grace) & Salas, Jesus M., 2016. "Determinants of CEO compensation: Generalist–specialist versus insider–outsider attributes," Journal of Corporate Finance, Elsevier, vol. 39(C), pages 53-77.
    7. Gounopoulos, Dimitrios & Pham, Hang, 2018. "Specialist CEOs and IPO survival," Journal of Corporate Finance, Elsevier, vol. 48(C), pages 217-243.

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