Compensation and Employment Contracts of Powerful CEOs

This paper examines why powerful CEOs are paid more in total compensation. Broadly, our results are consistent with the managerial ability view. First, CEO power is endogenously determined reflecting the CEO's ability. Specifically, founder-CEOs are more powerful than professional- and heir-CEOs because founder CEOs have higher perceived ability than other CEO types. Empirically, we find that a founder-CEO is 21 percent more likely to serve as the chairman of the board than a professional-CEO. Our findings also indicate that a founder-CEO is paid 12.4 percent more in total pay than a professional-CEO. However, this additional compensation is a premium for her superior ability. Third, we find that a founder-CEO prefers employment contracts that are disclosed publicly (or explicit) and rigid in contract terms