CEO Compensation and Strategy Inertia

Roman Inderst and Holger Mueller

No 5713, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper considers the joint optimal design of CEOs' on-the-job compensation and severance pay in a general optimal contracting framework. We obtain a novel argument for high-powered, non-linear CEO compensation such as bonus schemes and option grants that is different from existing arguments based on moral hazard and risk taking. Based on this argument, the CEO's optimal on-the-job compensation scheme is designed to minimize the use of costly severance pay to reduce CEO entrenchment, thus minimizing the CEO's informational rents. Our model generates novel empirical predictions concerning the interrelation of CEOs' on-the-job compensation and severance pay as well as CEO turnover which, to the extent that they have been tested, are consistent with the empirical evidence.

Keywords: Ceo compensation; Entrenchment; Stock options (search for similar items in EconPapers)
JEL-codes: D82 D86 G34 (search for similar items in EconPapers)
Date: 2006-06
New Economics Papers: this item is included in nep-fin
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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