Tenure and CEO Pay

Abstract:     
This paper studies how the CEO pay level and pay-performance sensitivity vary with her tenure in the firm. Predictions of four theories are considered: entrenchment, learning, career concerns and dynamic contracting hypotheses. We document a positive association between tenure and CEO pay levels, and an analogous positive relation between tenure and the CEO’s pay-performance sensitivity. The firm’s information environment has a weak impact on the tenure-pay relation. We also find no significant differences in the tenure-pay relation for CEOs hired from inside versus outside the firm. Firms with higher CEO Pay Slice or Gindex seem to have a higher tenure-pay level association when compared to firms with lower CPS or Gindex. No such effect is found for the CEO’s pay-performance sensitivity. Our results are generally most consistent with the career concerns and dynamic contracting hypotheses.

Number of Pages in PDF File: 42

Keywords: executive compensation, tenure, entrenchment, career concerns, learning, dynamic contracting

JEL Classification: G30, G34

working papers series