Competition for Talent Under Performance Manipulation: CEOs on Steroids

December 4, 2013 Leave a comment

Competition for Talent Under Performance Manipulation: CEOs on Steroids

Ivan Marinovic Stanford Graduate School of Business

Paul Povel University of Houston – Department of Finance, C.T. Bauer College of Business

October 22, 2013
Rock Center for Corporate Governance at Stanford University Working Paper No. 160

Abstract: 
We study how competition for talent affects CEO compensation, taking into consideration that CEO decisions are not contractible, CEO skills or talent are not observable, and CEOs can manipulate performance as measured by outsiders. Firms compete to appoint a CEO by offering contracts that generate large rents for the CEO. However, the incentive problems restrict how such rents can be created. We derive the equilibrium compensation contract offered by the firms, and we describe how the outcome is affected. Competition for talent leads to excessively high-powered performance compensation. Competition for talent can thus explain the increase in pay-performance sensitivity over the last few decades, and the extremely high-powered compensation packages observed in some markets. Given the high-powered incentive compensation, CEOs exert inefficiently high levels of effort and also distort the performance measure excessively. If the cost of manipulating performance is low, competition for talent may reduce the overall surplus, compared with a setup in which one firm negotiates with one potential CEO (and the firm extracts the rents). We discuss possible remedies, including regulatory limits to incentive compensation.

Filed under Research

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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