Generalist versus Specialist CEOs: The Impact of CEO Expertise on the Design of Compensation Contract

60 Pages Posted: 3 Jan 2019 Last revised: 21 Jan 2020

See all articles by Chunbo Liu

Chunbo Liu

Institute of Financial Studies, Southwestern University of Finance and Economics

Wei Shi

Deakin University

K.C. John Wei

Hong Kong Polytechnic University

Date Written: November 28, 2018

Abstract

Generalist CEOs receive higher pay than specialist CEOs. We examine the implications of CEO expertise for the structure of executive compensation. We follow contract theory and predict that information asymmetry induces generalist CEOs to overstate their ability to a larger extent when contracting with shareholders. Board of directors takes it into account by designing a compensation contract that links their pay more closely to firm performance. Our empirical results support this prediction, and the link is more pronounced when generalist CEOs are less known in the executive labor market or are externally hired. The results hold after we control for a battery of factors that potentially impact incentive pay, including firm characteristics and CEO ability. The endogeneity concern is mitigated through estimations based on instrumental variables and propensity score matching. Alternative explanations such as risk-taking and price efficiency are unlikely to account for our findings. We also discuss the impact of moral hazard on our findings. Overall, our results support the optimal contracting perspective of executive compensation and highlight the importance of CEO expertise generality in resolving adverse selection during the contracting process.

Keywords: Compensation Contract; CEO Expertise; Generalists; Information Asymmetry

JEL Classification: G34, J24, J33

Suggested Citation

Liu, Chunbo and Shi, Wei and Wei, Kuo-Chiang (John), Generalist versus Specialist CEOs: The Impact of CEO Expertise on the Design of Compensation Contract (November 28, 2018). Available at SSRN: https://ssrn.com/abstract=3297047 or http://dx.doi.org/10.2139/ssrn.3297047

Chunbo Liu (Contact Author)

Institute of Financial Studies, Southwestern University of Finance and Economics ( email )

55 Guanghuacun Street
Qingyang area
Chengdu, Sichuan 610074
China

Wei Shi

Deakin University ( email )

Burwood 3125, VIC
Melbourne, 3125
Australia
0404383819 (Phone)

Kuo-Chiang (John) Wei

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

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