Tenure and CEO Pay

In the paper, Tenure and CEO Pay, which was recently made publicly available on SSRN, my co-author, Darius Palia of Rutgers University, and I examine the relationship between a CEO’s pay levels and pay-performance sensitivity and her tenure in the firm. The previous empirical literature had examined such issues used historical data that did not include the large amounts of incentive pay (such as options and shares that were introduced in the 1990s). We examine the predictions of four theories (namely, entrenchment, learning, career concerns and dynamic contracting) from the extant literature in order to test the impact of tenure on pay levels and pay-performance sensitivities.

We find a positive relationship between tenure and CEO pay levels that is consistent with the entrenchment, learning, and the dynamic contracting hypotheses. We also find a positive correlation between the tenure and the CEO’s pay-performance sensitivity which is only consistent with the career concerns and dynamic contracting hypotheses.

Examining the impact of the firm’s information environment, we find very weak evidence, if any, for the learning hypothesis. We also find no significant changes in the tenure-pay relation when the CEO is hired either from the inside or the outside, a finding that is contrary with the predictions of both the entrenchment and learning hypotheses. Poorly-governed firms seem to have a higher tenure-pay level association when compared to well-governed firms. No such effect is found for the CEO’s pay-performance sensitivity. We conclude that our results generally seem most consistent with the career concerns and dynamic contracting hypotheses.

The full paper is available for download here.