CEOS' Outside Employment Opportunities and the Lack of Relative Performance Evaluation in Compensation Contracts

Posted: 9 Jun 2005

See all articles by Shivaram Rajgopal

Shivaram Rajgopal

Columbia Business School

Terry J. Shevlin

University of California-Irvine

Valentina L. Zamora

Seattle University - Albers School of Business and Economics

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Abstract

Although agency theory suggests that firms ought to index executive compensation to remove market-wide effects (i.e., RPE), there is little evidence to support this theory. Oyer (2004) posits that absence of RPE is optimal if the CEO's reservation wages from outside employment opportunities rise and fall with the economy's fortunes. We directly test and find support for Oyer's (2004) theory. We argue that the CEO's outside opportunities depend on his talent proxied by the CEO's financial press visibility and his firm's recent industry-adjusted ROA. Our results are robust to alternate explanations such as managerial skimming, oligopoly and asymmetric benchmarking.

Keywords: Compensation, Relative Performance Evaluation, talent

JEL Classification: M41, J33

Suggested Citation

Rajgopal, Shivaram and Shevlin, Terry J. and Zamora, Valentina L., CEOS' Outside Employment Opportunities and the Lack of Relative Performance Evaluation in Compensation Contracts. Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=739307

Shivaram Rajgopal (Contact Author)

Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Terry J. Shevlin

University of California-Irvine ( email )

Irvine, CA California 92697-3125
United States
2065509891 (Phone)

Valentina L. Zamora

Seattle University - Albers School of Business and Economics ( email )

901 12th Avenue
P.O. Box 222000
Seattle, WA 98122-1090
United States
206-296-5703 (Phone)

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