Restrictions on CEO Mobility, Performance-Turnover Sensitivity, and Compensation: Evidence from Non-compete Agreements
64 Pages Posted: 13 May 2018
Date Written: April 30, 2018
We examine the determinants of CEO non-compete agreements as well as the impact of these agreements on how the CEO is monitored and compensated by the board of directors. Using hand-collected data on CEO non-compete agreements, we find that the CEO is less likely to have a non-compete agreement if she faces greater employment risk and more likely when the firm expects to suffer greater economic harm if the CEO joins a competitor in some capacity. Consistent with the idea that non-compete agreements reduce the economic damage a departing CEO can cause a firm by restricting her ability to collaborate with a competitor, we find that the CEO performance-turnover sensitivity is significantly stronger when the CEO has a non-compete agreement in place. Finally, we find that CEO total compensation and incentive pay are higher if CEOs have enforceable non-compete contracts, and we observe these findings primarily in situations where the non-compete agreement is more likely to have a significant impact on the CEO’s outside options. Our empirical identification strategy utilizes staggered state-level changes in non-compete enforceability. We illustrate that restrictions on CEO mobility have important implications for how the board monitors and compensates the CEO.
Keywords: CEO Non-Compete Contracts; CEO Mobility, CEO Performance-Turnover Sensitivity; CEO Pay; CEO Compensation Structure
JEL Classification: G30, G32, G34, K22, L22, L25
Suggested Citation: Suggested Citation