when do you hire an external ceo
when everything is going wrong!
What is the point two position in a company
COO or Presdient
who is more expsensive candidate to hire
External CEO’s
what is the purpose of ceo compensation
attract ceo
retain ceo (losing them can be a huge cost -> stock market valuation loss, operation costs)
motivate ceo (aligning compensation with performance objectives)
Serves as a corporate governance tool
how can a CEO pay serve as a corporate governance tool
CEO may shirk if they only get a salary (no incentive)
CEO may not take any risks that could go against the board (they wanna keep them happy so their board doesnt lower salary)
CEO could also self-deal (acting in own self interests at the expense of the shareholders)
How can you align the CEO’s interests
offering shares
options
shares
this is equity of the company
options
- option to purchase a share at a strike price =; the strike price is the discount that was previously agreed upon
- Vesting period = after a certain amount of time
evidence shows that when a ceo is mostly compensated in shares
they engage in less risk taking behaviour (bc the share price could plummet)
DO YOU HAVE TO EXERCISE OPTIONS
NO
when do you exercise optons
when strike price ?? share price
Hhow does dodd-frank relate to ceo pay
tried to regulate the price of ceo pay to regualr employee pay
what are the two theories of ceo pay
optimal contracting
rent extraction
optimal contracting
giving the EXACT AMOUNT OF MONEY A CEO NEEDS!
Rent extraction
pay levels indicate market failure`
cons of rent extraction
ratcheting!! comp levels inflate over time
cuz everyone is always one. upping each other
Options introduce convexity
The more the shares go up in
market price, the more the
executive will earn
CONVEXITY
