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Explicit employment contracts and CEO compensation

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  • Song, Wei-Ling
  • Wan, Kam-Ming

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.

Suggested Citation

  • Song, Wei-Ling & Wan, Kam-Ming, 2017. "Explicit employment contracts and CEO compensation," Journal of Corporate Finance, Elsevier, vol. 44(C), pages 540-560.
    • Handle: RePEc:eee:corfin:v:44:y:2017:i:c:p:540-560
    DOI: 10.1016/j.jcorpfin.2014.11.002
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    More about this item

    Keywords

    Employment contracts; CEO compensation; Contract explicitness;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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