Frictions in the CEO Labor Market: The Role of Talent Agents in CEO Compensation*

Standard principal-agent models commonly invoked to explain executive pay practices do not account for the involvement of third-party intermediaries in the CEO labor market. This paper investigates the influence of one such intermediary – talent agents who seek out prospective employers and negotiate pay packages on behalf of CEOs. Jensen, Murphy and Wruck (2004) characterize the hiring of such agents as an obvious example of rent extraction by incoming CEOs. After controlling for economic factors, proxies for governance quality, and determinants of the CEO’s reservation wage, the first year compensation of CEOs who use these agents is significantly higher by about $10 million relative to the pay of CEOs who do not use such agents. Further analysis suggests that firms run by CEOs who use talent agents report superior future operating and stock performance, suggesting that these CEOs are not extracting rents at the expense of shareholders.

[1]  Ulrike Malmendier,et al.  Superstar CEOS , 2005 .

[2]  Shivaram Rajgopal,et al.  CEO Reputation and Earnings Quality , 2004 .

[3]  Marc L. Ross,et al.  Which CEO Characteristics and Abilities Matter , 2012 .

[4]  Benjamin E. Hermalin,et al.  Trends in Corporate Governance , 2003 .

[5]  Kevin J. Murphy,et al.  Stock Options for Undiversified Executives , 2000 .

[6]  D. Yermack.  Golden Handshakes: Separation Pay for Retired and Dismissed CEOS , 2005 .

[7]  D. Roulstone.  The Relation Between Insider‐Trading Restrictions and Executive Compensation , 2003 .

[8]  E. Fama,et al.  Industry costs of equity , 1997 .

[9]  Shijun Cheng.  R&D Expenditures and CEO Compensation , 2004 .

[10]  Sydney Finkelstein,et al.  The effects of ownership structure on conditions at the top: The case of CEO pay raises , 1995 .

[11]  John E. Core,et al.  Corporate Governance, CEO Compensation, and Firm Performance , 1997 .

[12]  E. Fama,et al.  Common risk factors in the returns on stocks and bonds , 1993 .

[13]  M. Conyon.  Compensation Consultants and Executive Pay , 2011 .

[14]  D. Hambrick,et al.  It's All about Me: Narcissistic Chief Executive Officers and Their Effects on Company Strategy and Performance , 2007 .

[15]  Dawn Matsumoto,et al.  Do CFOs Have Styles of Their Own? An Empirical Investigation of the Effect of Individual CFOs on Financial Reporting Practices , 2008 .

[16]  The Effects of Executives on Corporate Tax Avoidance , 2009 .

[17]  Isabel Y. Wang,et al.  What’s My Style? The Influence of Top Managers on Voluntary Corporate Financial Disclosure , 2008 .

[18]  Ian D. Gow,et al.  Correcting for Cross-Sectional and Time-Series Dependence in Accounting Research , 2009 .

[19]  D. Larcker,et al.  The Power of the Pen and Executive Compensation , 2007 .

[20]  Kevin J. Murphy,et al.  Performance Pay and Top Management Incentives , 1990 .

[21]  Laura T. Starks,et al.  Internal Monitoring Mechanisms and CEO Turnover: A Long-Term Perspective , 2001 .

[22]  Olubunmi Faleye,et al.  Classified Boards, Firm Value, and Managerial Entrenchment , 2007 .

[23]  D. Hambrick,et al.  TOP EXECUTIVE COMMITMENT TO THE STATUS QUO: SOME TESTS OF ITS DETERMINANTS , 1993 .

[24]  Constance E. Helfat,et al.  Specificity of CEO human capital and compensation , 1997 .

[25]  D. Rubin,et al.  The central role of the propensity score in observational studies for causal effects , 1983 .

[26]  David F. Larcker,et al.  AN ANALYSIS OF THE USE OF ACCOUNTING AND MARKET MEASURES OF PERFORMANCE IN EXECUTIVE-COMPENSATION CONTRACTS , 1987 .

[27]  Richard G. Sloan.  Accounting earnings and top executive compensation , 1993 .

[28]  Jerold B. Warner,et al.  Stock prices and top management changes , 1988 .

[29]  Karl A. Muller,et al.  Asymmetric treatment of reported pension expense and income amounts in CEO cash compensation calculations , 2006 .

[30]  Alan D. Jagolinzer,et al.  Chief Executive Officer Equity Incentives and Accounting Irregularities , 2009 .

[31]  Stephen A. Hillegeist,et al.  The Role and Effect of Compensation Consultants on CEO Pay , 2007 .

[32]  D. Larcker,et al.  Economic Characteristics, Corporate Governance, and the Influence of Compensation Consultants on Executive Pay Levels , 2008 .

[33]  W. Greene,et al.  计量经济分析 = Econometric analysis , 2009 .

[34]  Kevin J. Murphy,et al.  Executive Pay and 'Independent' Compensation Consultants , 2009 .

[35]  David F. Larcker,et al.  On the Use of Instrumental Variables in Accounting Research , 2008 .

[36]  Mark M. Carhart.  On Persistence in Mutual Fund Performance , 1997 .

[37]  Rakesh Khurana,et al.  Searching for a Corporate Savior: The Irrational Quest for Charismatic CEOs , 2002 .

[38]  Kevin J. Murphy,et al.  Remuneration: Where We've Been, How We Got to Here, What are the Problems, and How to Fix Them , 2004 .

[39]  D. Larcker,et al.  Corporate governance, chief executive officer compensation, and firm performance 1 The financial sup , 1999 .

[40]  Rachel M. Hayes,et al.  The Roles of Performance Measures and Monitoring in Annual Governance Decisions in Entrepreneurial Firms , 2002 .

[41]  John E. Core,et al.  Estimating the Value of Employee Stock Option Portfolios and Their Sensitivities to Price and Volatility , 2002 .

[42]  Kevin J. Murphy,et al.  CEO Pay and Appointments: A Market-Based Explanation for Recent Trends , 2004 .

[43]  I. Laksmana.  Corporate Board Governance and Voluntary Disclosure of Executive Compensation Practices , 2007 .

[44]  Stephen A. Hillegeist,et al.  The Incentives of Compensation Consultants and CEO Pay , 2009 .

[45]  Mathew L. A. Hayward,et al.  Believing one's own press: the causes and consequences of CEO celebrity , 2004 .