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The Effect of Monitoring on CEO Compensation in a Matching Equilibrium

Published online by Cambridge University Press:  09 March 2018

Pierre Chaigneau  and
Nicolas Sahuguet
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Abstract

We consider a model of chief executive officer (CEO) selection, dismissal, and retention. Firms with larger blockholder ownership monitor more; they get more information about CEO ability, which facilitates the dismissal of low-ability CEOs. These firms are matched with CEOs whose ability is more uncertain. For retention purposes, the compensation of these CEOs is more sensitive to firm value and relatively less sensitive to business conditions. Moreover, these CEOs receive lower salaries when CEO skills are sufficiently transferable. A diffusion of best monitoring practices increases competition for CEOs and raises CEO pay in all firms, including those with unchanged monitoring ability.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 53 , Issue 3 , June 2018 , pp. 1297 - 1339
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

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Footnotes

1

We thank Paul Malatesta (the editor) and an anonymous referee for valuable comments that substantially improved the paper. We also thank Marco Becht, Vicente Cunat, Ingolf Dittmann, Alex Edmans, Robert Gibbons, Dirk Jenter (Western Finance Association discussant), Sergei Kovbasyuk (Association Francaise de Finance discussant), Patrick Legros, Paul Oyer, Nicola Persico, Luke Taylor, Lucy White, Craig Wilson, and Jeffrey Zwiebel for interesting comments and discussions, as well as participants in seminars at Ecares–Université Libre de Bruxelles, Erasmus University Rotterdam, ESSEC, HEC Montréal, University of North Carolina, Queen’s University, the 2011 Association Française de Finance conference, the 2012 European Summer Symposium in Economic Theory conference, the 2012 Petralia economics workshop, the 2013 European Economic Association conference, and the 2014 Western Finance Association conference.

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