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Internal vs External CEO Choice and the Structure of Compensation Contracts

58 Pages Posted: 1 Jun 2010 Last revised: 14 Mar 2013

Eloic Peyrache

HEC Paris - Economics & Decision Sciences

Frédéric Palomino

EDHEC Business School - Department of Economics & Finance

Multiple version iconThere are 2 versions of this paper

Date Written: February 28, 2012

Abstract

Any firm choosing a 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, CEO compensation level, bonus, equity

JEL Classification: G34, M51, M52

Suggested Citation

Peyrache, Eloic and Palomino, Frédéric, Internal vs External CEO Choice and the Structure of Compensation Contracts (February 28, 2012). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1617676 or http://dx.doi.org/10.2139/ssrn.1617676

Eloic Peyrache

HEC Paris - Economics & Decision Sciences ( email )

Paris
France

Frédéric Palomino (Contact Author)

EDHEC Business School - Department of Economics & Finance ( email )

France

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