Bebchuk Scrutinizes 'CEO Centrality'

What contribution does CEO centrality make to the value, peformance, and behavior of public companies? According to a working paper authored by Lucian Bebchuk, Martijn Cremers, and Urs Peyer, the issue of CEO centrality--that is, the importance of the CEO within the executive team in ability, contribution, and value creatio--needs more careful study.

 
Their proxy for CEO centrality is based on the CEO’s pay slice (CPS), which they define as the percentage of aggregate compensation awarded to the firm’s top five executives. A higher CPS indicates higher importance of the CEO within the top executive team; meaning, the CEO has significant bearing on these executives’ compensation.

In particular, CEO centrality is correlated with:

• lower (industry-adjusted) accounting profitability
• lower stock returns accompanying acquisitions announced by the firm and higher likelihood of a negative stock return accompanying such announcements;
• higher odds of the CEO’s receiving a "lucky" option grant at the lowest price of the month
• greater tendency to reward the CEO for luck due to positive industry-wide shocks;
• lower performance sensitivity of CEO turnover
• lower firm-specific variability of stock returns over time

The authors also took into account the CEO’s tenure, the CEO’s status as a founder or large owner, and the aggregate compensation of a company's top five executives compared to competitors in the same field, as points of further scrutiny. Controls are also added to measure how incentive-based CEO compensation really is as well as whether it is notably more incentive-based than other top executives. Inequality among the top five executives other than the CEO is also measured.

Ultimately, additional research is necessary to delve deeper into firm behavior and decision-making, the authors write. They discerned that a high CPS value was best for low-value firms and that the CPS levels of some firms were excessive.