CEO Expertise and the Design of Compensation Contracts: Evidence from Generalist versus Specialist CEOs
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Research has shown that generalist CEOs enjoy higher pay than do specialist CEOs. However, the implication of CEO expertise on how CEOs are paid is largely unknown. We conjecture that because of information asymmetry, generalist CEOs may overstate their ability when contracting with shareholders. Thus the pay should be more closely linked to firm performance for generalist CEOs than for specialists in an optimal contract. Our results support this conjecture, especially when generalist CEOs are early in their tenure or are less known in the executive labor market or when they are more important for firm performance. The results are robust to endogeneity concerns. Alternative explanations such as risk-taking or price efficiency are unlikely to account for our findings. Overall, our results support the optimal contracting perspective of executive compensation.