Sunday, July 20, 2008

Superstar CEOs

Abstract from NBER Working Paper by Malmendier and Tate:
Compensation, status, and press coverage of managers in the U.S. follow a highly skewed distribution: a small number of 'superstars' enjoy the bulk of the rewards. We evaluate the impact of CEOs achieving superstar status on the performance of their firms, using prestigious business awards to measure shocks to CEO status. We find that award-winning CEOs subsequently underperform, both relative to their prior performance and relative to a matched sample of non-winning CEOs. At the same time, they extract more compensation following the award, both in absolute amounts and relative to other top executives in their firms. They also spend more time on public and private activities outside their companies, such as assuming board seats or writing books. The incidence of earnings management increases after winning awards. The effects are strongest in firms with weak governance, even though the frequency of obtaining superstar status is independent of corporate governance. Our results suggest that the ex-post consequences of media-induced superstar status for shareholders are negative.
So, if Rocky loses at the end of Rocky II, he would have worked harder in Rocky III and beat Mr. T in their first meeting. Ah, but he never would have fought Mr. T had he lost to Apollo in Rocky II.

More seriously, we would expect this to some extent due to mean reversion (in sports, it is known as the Sports Illustrated or the John Madden Football curse). The relevant question for shareholders is whether or not the superstar performance induced by the incentives outweigh the diminished performance in the following year.

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