The Market for CEOs: Evidence from Private Equity

This post was originally published on this site. Click here to Read More from The Harvard Law School Forum on Corporate Governance and Financial.
Posted by Paul A. Gompers (Harvard Business School), Steven N. Kaplan (University of Chicago), and Vladimir Mukharlyamov (Georgetown University), on Wednesday, August 10, 2022

Editor’s Note:

Paul A. Gompers is Eugene Holman Professor of Business Administration at Harvard Business School; Steven N. Kaplan is the Neubauer Family Professor of Entrepreneurship and Finance at the University of Chicago Booth School of Business; and Vladimir Mukharlyamov is Assistant Professor of Finance at the McDonough School of Business at Georgetown University. This post is based on their recent paper. Related research from the Program on Corporate Governance includes Paying for Long-Term Performance (discussed on the Forum here) by Lucian Bebchuk and Jesse Fried.

A wide range of research examines the market for CEOs and executive mobility in public companies while largely ignoring the market for CEOs in private equity funded companies. The research on public companies typically finds low levels of mobility for CEOs, particularly recently. For example, Cziraki and Jenter (2021) study CEO changes at S&P 500 companies from 1993 and 2012 and find that internal promotions are much more common than external hires: 80% of new CEOs are insiders and 90% are either the hiring firm’s current executives, former executives, board members, or co-workers of its directors. Other work finds that external hires for public companies are generally less than 30% and never more than 50%, even when turnover is forced or performance related.

We augment the work on public company CEOs by studying the market for CEOs among larger U.S. companies (enterprise value greater than $1 billion) purchased by private equity firms between 2010 and 2016. We find that 71% of those companies hired new CEOs under private equity ownership. Almost 75% of the new CEOs are external hires with 67% being complete outsiders. The most recent experience of 69% of the outside CEOs was at a public company with 32% at an S&P 500 company. Almost 50% of the external hires have some previous experience at an S&P 500 company. These results are strikingly different from studies that look at public companies. The external CEOs also tend to have previous experience in the same industry as the hiring company.

Next, we estimate the compensation of the buyout firm CEOs. The median buyout in our sample earned 2.5 times on its equity investment. Companies with external CEOs appointed at the time of the buyout receive significant compensation. Using the performance of the buyouts and survey evidence on buyout equity incentives, we estimate that buyout firm CEOs earned compensation substantially greater than that of CEOs of similarly sized public companies and of comparable magnitude to compensation of S&P 500 CEOs.

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