The Journal of Finance publishes leading research across all the major fields of finance. It is one of the most widely cited journals in academic finance, and in all of economics. Each of the six issues per year reaches over 8,000 academics, finance professionals, libraries, and government and financial institutions around the world. The journal is the official publication of The American Finance Association, the premier academic organization devoted to the study and promotion of knowledge about financial economics.
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CEOs' Outside Employment Opportunities and the Lack of Relative Performance Evaluation in Compensation Contracts
Published: 08/03/2006 | DOI: 10.1111/j.1540-6261.2006.00890.x
SHIVARAM RAJGOPAL, TERRY SHEVLIN, VALENTINA ZAMORA
Although agency theory suggests that firms should index executive compensation to remove market‐wide effects (i.e., RPE), there is little evidence to support this theory. Oyer (2004, Journal of Finance 59, 1619–1649) posits that an absence of RPE is optimal if the CEO's reservation wages from outside employment opportunities vary with the economy's fortunes. We directly test and find support for Oyer's (2004) theory. We argue that the CEO's outside opportunities depend on his talent, as proxied by the CEO's financial press visibility and his firm's industry‐adjusted ROA. Our results are robust to alternate explanations such as managerial skimming, oligopoly, and asymmetric benchmarking.