Do CEOs always earn their pay? Using data on executive compensation along with accounting data for S&P 1500 firms,this column explores how swings in firm value that are unrelated to CEO actions (i.e. ‘luck’) affect CEOs’ opportunities in the labour market and the performance of firms that hire lucky CEOs. It finds that luck makes CEOs more likely to move to a new firm subject to low analyst coverage and in less competitive industries, where they receive a higher pay compared to industry peers. Hiring lucky CEOs harms firm performance due to a surge in operating costs and a poorer usage of corporate assets
CEOs occupy the quintessential position of modern corporations and have a vast influence on the firms they lead. At the same time, the CEO job is generously rewarded. In 2019, the average compensation of S&P 500’s CEOs amounted to $14 million – a figure which has grown by about 50% since 2009 (Roe 2019). Such remarkable trends have fuelled an intense debate among investors and the media on the ‘value for money’ of high-paid CEOs (Economist 2020).
Scholars have argued that CEOs often find ways to assign themselves high pay at the detriment of shareholders. A notable example is provided by superstar CEOs (referring to those celebrated in media outlets), who have been shown to enjoy higher compensation while their firms underperform (Malmendier and Tate 2009). In contrast, traditional agency theories suggest that CEO compensation is a tool to incentivise CEOs to increase shareholder wealth. Thus, sizable compensation packages reflect a significant contribution of CEOs to firm performance and the ample availability of outside options in the managerial labour market. Accordingly, the managerial labour market efficiently allocates high compensation to highly demanded CEOs and, at the same time, introduces competition, disciplining CEOs’ behaviour and aligning pay and performance.
Our recent study (Amore and Schwenen 2020) suggests that the labour market may actually provide a vehicle for CEOs to derive personal benefits unrelated to their managerial effort.