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
Date Written: July 28, 2020
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: Suggested Citation