CEO reputation and stock-based compensation

I develop a theory of stock-based compensation contracts for the chief executive officers (CEOs) of firms and confront the theoretical predictions with recent CEO compensation data. The model characterizes the optimal contract for a CEO whose reputation evolves as signals of the executive's ability are observed by shareholders. Using various proxies for CEO reputation, I show a positive and economically meaningful relationship between stock-based pay-sensitivities and CEO reputation. The findings are robust to controls for CEO age, firm size, the dollar, variability of the stock returns, and industry effects. (C) 2003 Elsevier Science B.V. All rights reserved.