Serial CEO Incentives and the Structure of Managerial Contracts

44 Pages Posted: 30 May 2008

See all articles by Mariassunta Giannetti

Mariassunta Giannetti

Stockholm School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Swedish House of Finance

Multiple version iconThere are 3 versions of this paper

Date Written: August 2007

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

JEL Classification: G32, J33, L14

Suggested Citation

Giannetti, Mariassunta, Serial CEO Incentives and the Structure of Managerial Contracts (August 2007). CEPR Discussion Paper No. DP6422. Available at SSRN: https://ssrn.com/abstract=1138535

Mariassunta Giannetti (Contact Author)

Stockholm School of Economics ( email )

P.O. Box 6501
Sveavagen 65
SE-113 83 Stockholm
Sweden
+46 8 736 9607 (Phone)
+46 8 312 327 (Fax)

HOME PAGE: http://sites.google.com/site/mariassuntagiannetti/Home

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

Register to save articles to
your library

Register

Paper statistics

Downloads
2
Abstract Views
525
PlumX Metrics