Ceo Non-Compete Agreements Job Risk And Compensation

Finally, the CEO acknowledges that non-competition bans impose costs on him due to reduced mobility and an increased risk of dismissal for poor performance. As a result, a rational CEO calls for higher pay for increased employment risk and reduced mobility. Consistent with this view, we show that CEOs with non-compete agreements have higher compensation. In addition, once the CEO has signed the non-competition agreement, she is encouraged to take steps that may reduce the risk of employment. For example, it may make financial information more opaque or put less risky projects in the mouth, even if such behaviour harms shareholders. Recognizing these potential agency problems, the company will structure its enhanced compensation so that its interests are in line with those of shareholders. We find that the CEO`s capital-based compensation represents a larger percentage of his total compensation in the presence of a non-compete clause and that it has higher incentives to compensate for its increased motivation to undertake less risky projects in the face of a greater risk of personal employment. We use exogenous changes in the applicability of non-competition prohibitions at the state level to draw causal conclusions. Our paper shows that restrictions on CEO mobility have a significant impact on the way the board monitors and determines CEO compensation. In doing so, it offers a partial solution to a long-standing financial economy puzzle of a weak relationship between the company`s performance and CEO revenue.

In particular, companies that do not have competition agreements with CEOs are more reluctant to lay off their CEOs for poor performance, as these CEOs can cause greater economic harm to the company by joining competitors. The distinction between restrictions on CEO mobility and restrictions on staff mobility is particularly important, as the departure of a CEO (among all employees) for a competitor can cause the greatest economic harm to the company. [1] We also establish a national performance capacity index, based on Garmaise classifications (2011) and data provided by Russell Beck at Beck Reed Riden LLP. The existence of a non-compete agreement also influences the discipline of the board of directors for poor performance. In the absence of a non-compete agreement, the company may be reluctant to fire the CEO for poor performance, as it can cause considerable economic harm to the company by working for a competitor. However, in the presence of a non-compete agreement, it is more likely that the company will respond to the CEO because of poor performance, since the CEO is, for a while, largely limited by the work of a competitor. Consistent with this argument, we find that the CEO`s sensitivity to company performance is significantly stronger when the CEO has a non-compete agreement. In addition, these results will be reinforced when the application of non-competition agreements is stricter at the state level and there is no legislation on illegitimate redundancies at the state level, which can increase the cost of firing a CEO. Unlike senior public servants, CEOs can negotiate their employment contracts because they not only have more bargaining power than senior public servants, but also because they have legal representation in their negotiations with companies. From the company`s perspective, the loss of a CEO to a competitor in any function can cause serious economic harm, as it knows its trade secrets, major suppliers and customers, strategic plans, strengths and weaknesses vis-à-vis its competitors.

[2] Therefore, the presence of a CEO competition agreement will likely be the result of a bargaining game between the CEO and the company. In particular, it is less likely that the CEO entered into a non-compete agreement when his or her employment is less secure and such an agreement is more likely to exist if his or her work for a competitor in an executive or non-executive role would cause a prejudation