Serial CEO Incentives and the Structure of Managerial Contracts

Mariassunta Giannetti

No 6422, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: Executive compensation; Managerial labour market; Short-termism (search for similar items in EconPapers)
JEL-codes: G32 J33 L14 (search for similar items in EconPapers)
Date: 2007-08
New Economics Papers: this item is included in nep-bec
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Citations: View citations in EconPapers (7)

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Journal Article: Serial CEO incentives and the structure of managerial contracts (2011)
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