CEOs' Outside Employment Opportunities and the Lack of Relative Performance Evaluation in Compensation Contracts





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    • Rajgopal and Shevlin are from the University of Washington; Zamora is from Boston College. Rajgopal and Shevlin acknowledge support from the Accounting Development Fund at the University of Washington. Zamora acknowledges support from Boston College. We appreciate written comments from an anonymous referee, Luzi Hail, Frank Hodge, and Dawn Matsumoto, and verbal comments from James Jiambalvo, Eric Noreen, Jane Kennedy, and other workshop participants at the University of Washington. We thank Jennifer Francis, Allen Huang, and Amy Zang for graciously agreeing to share their CEO press citations data with us.


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.