CEO Compensation and the Role of In-House Experience

Abstract

We hand collect a database that includes a direct measure of the incoming CEO’s in-house experience at the time of succession. In contrast to previous studies that rely on an insider-outsider binary variable, our continuous variable allows us to examine compensation incentives following CEO successions across a continuum of in-house experience. We hypothesize and confirm that more in-house experience prior to succession leads to lower CEO total compensation at succession. In addition to total compensation, we find significant differences in the components of compensation. CEOs with more in-house experience receive larger cash-based incentives and smaller performance-based incentives than CEOs with little or no in-house experience at succession. Consistent with expectations, CEOs with substantial in-house experience also have lower wealth-to-risk sensitivities. Overall, our results show that CEO incentive contacts are significantly influenced by the level of in-house experience.

Keywords: CEO succession, executive compensation, corporate governance

JEL Classification: G30, G34, J33