CEOs’ Diverse Career Experiences and the Effectiveness of Compensation Contracts: Evidence from Compensation Stickiness

Abstract

CEO compensation stickiness represents an important indicator to measure the effectiveness of compensation contracts. This study uses CEO career experience data and compensation stickiness data from Shanghai and Shenzhen A-share listed companies from 2015 to 2020 to investigate the compensation contracts’ effectiveness of CEOs with diverse career experiences. The findings are as follows: 1) Compensation stickiness is more pronounced for CEOs with diverse career experiences. According to the mechanism test, these CEOs with diverse career experiences can obtain compensation incentives by reducing corporate uncertainty perception and improving total factor productivity. This approach leads to increased compensation stickiness and the effectiveness of compensation contracts. CEOs with diverse career experiences may receive excess compensation by raising agency costs, which intensifies compensation stickiness and weakens the effectiveness of compensation contracts. 2) Compensation stickiness of CEOs with diverse career experiences is more significant in companies with lower investor protection, which brings about less effective compensation contracts. In contrast, in companies with higher diversification, the compensation stickiness of CEOs with diverse career experiences is more significant, which delivers more effective compensation contracts. The conclusions deepen the research of CEO compensation contracts and provide a helpful reference for CEO compensation management practices.

Keywords

CEOs’ diverse career experiences / effectiveness of compensation contracts / compensation stickiness / agency problems / incentive mechanisms

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