CEO Expertise and the Design of Compensation Contracts: Evidence from Generalist versus Specialist CEOs

What is it about?

In this paper, we examine the implication of CEO expertise on pay performance sensitivity. Generalist CEOs, who have more outside opportunities, may overstate their ability when contracting with shareholders. We find evidence in support of the conjecture that the firm tends to design the compensation contract in a way that more closely links CEO pay to firm performance as they rationally anticipate this tendency. The main contribution is that we show pay-performance sensitivity actually reflects the nature of CEOs' expertise, i.e., the generality of skills.

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