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Corporate Governance

: The Harvard Law School Corporate Governance Blog

Tenure and CEO Pay

By Harvard Law School Program on Corporate Governance

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Editor?s Note: Martijn Cremers is an Associate Professor of Finance at Yale University.

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.

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Full post as published by The Harvard Law School Corporate Governance Blog on August 23, 2010 (boomark / email).