Affiliation: College of Arts and Sciences, Department of Economics
Chapter 1 provides empirical evidence of the effect of stock options and total compensation on the job turnover of corporate Chief Executive Officers (CEOs). Our estimates indicate that both the amount and the composition of the compensation package are significant determinants of turnover probability. Holding the total amount of compensation constant, an increase in the proportion of stock options in the total compensation from its median level (0.48) to the 75th percentile level (0.67), would result in a decrease in annual turnover probability from 16 percent to 13.5 percent. On the other hand, holding the proportion of stock options constant, if the total compensation increases from the median level ($2.5 million) to the 75 percentile level ($5 million), turnover probability would decrease to 14 percent. In Chapter 2 we develop a model to describe the relationship between incentive and tenure in a principal-agent setting. One of the standard results of principal agent theories is that pay-for-performance sensitivity increases with the agent's tenure, but this has been rejected by prior empirical studies in CEO compensation literature. In our model, uncertainty dictates if the principal chooses input-based compensation or output-based compensation, where input-based compensation is less incentive intensive. We show that the principal is more likely to choose input-based compensation later in the agent's tenure. This demonstrates that pay-for-performance sensitivity decreases with the agent's tenure -result consistent with the prior empirical findings in the CEO compensation literature. Chapter 3 reexamines the relationship between pay-for-performance sensitivity and tenure using CEO compensation data. Our estimates indicate that there is a strong and positive relationship between pay-for-performance sensitivity and CEO tenure. For CEOs with tenure less than or equal to six years, an improvement in firm performance from the median level to the 75th percentile level would only lead to a 0.06 percent increase in total compensation. For CEOs with tenure of seven years or more, the same improvement in firm performance would lead to an 8 percent increase in total compensation. Our new findings strongly support standard principal-agent theories, but do not support our model in Chapter 2.