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The Market for CEO Talent: Implications for CEO Compensation

  • Martijn Cremers
  • Yaniv Grinstein

We study the market for CEO talent in public U.S. firms during the years 1993-2005. CEO talent pools are not homogenous across firms and industries. About 68% of new CEOs are former employees of their own firms (“insider CEOsâ€) and the rest come from outside the firm (“outsider CEOsâ€). We find wide disparities in talent pool structure across industries, with some industries having almost no outsider CEOs and other industries having a majority of outsider CEOs. Our central conjecture in this study is that, to the extent that the exogenous (to the firm) costs of hiring CEOs from outside the firm limit the potential outside options of the CEO and the firm, the compensation to the CEO should depend more on the compensation distribution within the pool rather than outside the pool. Consistent with this conjecture, industry talent pool structure helps explain several compensation practices: CEO compensation is benchmarked against other firms only in industries that have high percentage of outsider CEOs and pay-for¬luck is less prevalent when the industry has a low percentage of outsider CEOs. Finally, while CEO talent pools seem to explain cross-sectional variations in CEO compensation, they have little power in explaining the rise in CEO compensation in public U.S. firms in recent years.

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Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number amz2385.

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Date of creation: 01 May 2009
Date of revision: 01 Sep 2009
Handle: RePEc:ysm:somwrk:amz2385
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