Theoretical and Applied Economics (Mar 2023)
Incentivizing CEOs via pay and forced turnover: Do tenure and managerial ability matter?
Abstract
Direct pay and dismissal for poor performance are important instruments to incentivize CEOs. I empirically analyze how the use of them depends on tenure and managerial ability. For managers promoted from within a firm, ability is proxied by age at the time of promotion. For outside hires, I use constructed measures of reputation based on media citations. Using a sample of firms in S&P 1500, I find that pay and performance sensitivity of dismissal probability increase with tenure. For outsider CEOs, better reputation increases pay, but decreases tenure sensitivity of pay with stronger effects for more current measures. For both insiders and outsiders, ability decreases the dismissal probability.
