Internal versus external CEO choice and the structure of compensation contracts

Frédéric Palomino and Eloïc Peyrache ()
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Frédéric Palomino: EDHEC - EDHEC Business School - UCL - Université catholique de Lille
Eloïc Peyrache: GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique

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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.

Keywords: CEO choice; compensation contracts (search for similar items in EconPapers)
Date: 2013-08
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Citations: View citations in EconPapers (4)

Published in Journal of Financial and Quantitative Analysis, 2013, 48 (04), pp.1301-1331. ⟨10.1017/S0022109013000434⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01069195

DOI: 10.1017/S0022109013000434

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