CEO Contract Design: How Do Strong Principals Do It?

Henrik Cronqvist and Ruediger Fahlenbrach

No 11-14, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We study changes in the design of CEO contracts when firms transition from being public with dispersed shareholders to having strong principals in the form of private equity sponsors. These principals redesign some, but far from all, contract characteristics. There is no evidence that they reduce excessive salary, bonus, and perquisites, but they redesign contracts away from earnings-based and non-financial bonus criteria. They do not change CEO severance cash pay, but they redesign contracts so unvested equity is forfeited by terminated CEOs, and they restrict the resale market for equity. CEO contracts are also redesigned so that a significant fraction of equity grants performance-vests: if the agent does not produce prespecified multiples or IRRs, the equity is forfeited. We find that even these sophisticated principals rely on subjective performance evaluation, use some time-vesting equity, do not use premium options, and do not condition vesting on relative industry performance. We compare the real-world contracts in our sample to contracting theories, and we relate our findings to recent discussions of executive compensation reform.

Keywords: Executive compensation; employment contracts; contracting theory; LBOs (search for similar items in EconPapers)
JEL-codes: G30 G34 J33 (search for similar items in EconPapers)
Date: 2011-03
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Citations: View citations in EconPapers (2)

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Journal Article: CEO contract design: How do strong principals do it? (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1114

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