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

45 Pages Posted: 3 Jan 2019 Last revised: 17 Aug 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: July 28, 2020

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. Boards of directors take this into account by designing compensation contracts that link 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 hired externally. The results hold after we control for a battery of factors that potentially affect incentive pay, including firm characteristics and CEO ability. 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; Generalist; Information asymmetry; Adverse selection

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 (July 28, 2020). 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

Kuo-Chiang (John) Wei

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

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