Footnotes (18)



Managerial Entrenchment and the Market for CEOs

Fabio Feriozzi

Fundación Instituto de Empresa, S.L. - Department of Finance

February 14, 2009

This paper provides an explanation for why increased board independence might induce higher CEO pay. I propose a simple model in which managers have private benefits of control and may become entrenched. Managers have unknown ability which affects their performance, and derive incentives from turnover in the labor market. Successful managers obtain higher compensation and retain private benefits. Failing managers, on the contrary, reveal to be less skilled, are fired, and lose their private benefits. Entrenchment allows failing managers to keep their job with some probability, and has two effects on the managerial labor market. First, it prevents captured companies from seeking better managers: this demand effect reduces the equilibrium pay of CEOs and weakens career concerns. Second, entrenchment decreases the number of successful managers: this supply effect increases the equilibrium pay of CEOs and strengthens career concerns. The model predicts that if the probability of firing an entrenched manager is small, the demand effect dominates, and a reduction in the ex-ante probability of entrenchment increases managerial compensation.

Number of Pages in PDF File: 24

Keywords: Executive Compensation, Managerial Entrenchment, Career Concerns

JEL Classification: D83, D86, G34

working papers series

Download This Paper

Date posted: February 14, 2009  

Suggested Citation

Feriozzi, Fabio, Managerial Entrenchment and the Market for CEOs (February 14, 2009). Available at SSRN: http://ssrn.com/abstract=1342989 or http://dx.doi.org/10.2139/ssrn.1342989

Contact Information

Fabio Feriozzi (Contact Author)
Fundación Instituto de Empresa, S.L. - Department of Finance ( email )
María de Molina 13
Madrid, 28006
Feedback to SSRN

Paper statistics
Abstract Views: 432
Downloads: 90
Download Rank: 129,032
Footnotes:  18
Paper comments
No comments have been made on this paper

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo5 in 0.329 seconds