Associate Professor of Strategy
Firm-specific Knowledge; CEO Compensation; CEO Dismissal; Specific Human Capital; Knowledge Structure; Corporate Governance; Board Process and Remuneration at the Top;
Journal Article | Strategic Management Journal | 38 | September 2017
Firm-specific Knowledge Assets and Employment Arrangements: Evidence from CEO Compensation Design and CEO Dismissal
Research summaryThe authors argue that firms with greater specificity in knowledge structure need to both encourage their CEOs to stay so that they make investments with a long-term perspective, and provide job securities to the CEOs so that they are less concerned about the risk of being dismissed. Accordingly, the authors found empirical evidence that specificity in firm knowledge assets is positively associated with the use of restricted stocks in CEO compensation design (indicating the effort of CEO retention) and negatively associated with CEO dismissal (indicating the job securities the firm committed to CEOs). Furthermore, firm diversification was found to mitigate the effect of firm-specific knowledge on both CEO compensation design and CEO dismissal, as CEOs are more removed from the deployment of knowledge resources in diversified firms.
Managerial summaryA firm's knowledge structure, i.e. the extent to which its knowledge assets are firm-specific vs. general, has implications for both CEO compensation design and CEO dismissal. In particular, the authors find that a firm with a high level of firm-specific knowledge has the incentive to retain its CEO, through the use of restricted stocks in CEO compensation. Such a firm is also likely to provide job security for its CEO, leading to a lower likelihood of CEO dismissal. These arguments, however, are less likely to hold in diversified corporations, as CEOs in such corporations are more removed from the deployment of knowledge assets. A key managerial implication is that CEO compensation and job security design should be made according to the nature of firm knowledge assets.