Frictions in the CEO Labor Market: The Role of Talent Agents in CEO Compensation

Posted: 4 Feb 2011

See all articles by Shivaram Rajgopal

Shivaram Rajgopal

Columbia Business School

Daniel J. Taylor

Wharton School, University of Pennsylvania

Mohan Venkatachalam

Duke University - Fuqua School of Business

Date Written: February 3, 2011

Abstract

Standard principal-agent models commonly invoked to explain executive pay practices do not account for the involvement of third-party intermediaries in the CEO labor market. This paper investigates the influence of one such intermediary – talent agents who seek out prospective employers and negotiate pay packages on behalf of CEOs. Jensen, Murphy and Wruck (2004) characterize the hiring of such agents as an obvious example of rent extraction by incoming CEOs. After controlling for economic factors, proxies for governance quality, and determinants of the CEO’s reservation wage, the first year compensation of CEOs who use these agents is significantly higher by about $10 million relative to the pay of CEOs who do not use such agents. Further analysis suggests that firms run by CEOs who use talent agents report superior future operating and stock performance, suggesting that these CEOs are not extracting rents at the expense of shareholders.

Suggested Citation

Rajgopal, Shivaram and Taylor, Daniel and Venkatachalam, Mohan, Frictions in the CEO Labor Market: The Role of Talent Agents in CEO Compensation (February 3, 2011). Contemporary Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1754646

Shivaram Rajgopal (Contact Author)

Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Daniel Taylor

Wharton School, University of Pennsylvania ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Mohan Venkatachalam

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7859 (Phone)
919-660-7971 (Fax)

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