How Outside Opportunities Affect CEO Compensation: Fact or Friction?

We investigate the impact of outside employment opportunities on CEO compensation by integrating market-based and barrier-based perspectives. The former perspective posits that when such opportunities arise, retention concerns elevate CEO compensation, while the latter emphasizes how cognitive, normative, and legal mobility barriers will likely exert a countervailing effect. We test our hypotheses in the quasi-experimental context of sudden CEO deaths, which create immediate demand for peer CEOs within the same industries as firms that have unexpectedly lost their CEOs face an immediate need to fill leadership vacancies. Using a comprehensive dataset of sudden CEO deaths among U.S. public firms from 1997 to 2020, we apply a combined methodology of coarsened exact matching and difference-in-differences to analyze compensation changes for peer CEOs. Our findings reveal that while peer CEOs receive higher compensation after the events of sudden CEO deaths, this effect is significantly diminished for CEOs with longer organizational tenure, those in industries characterized by less frequent executive mobility, and those operating in states with stronger enforcement of non-compete agreements. By showing how and why market forces within the CEO labor market are affected by nuanced organizational and institutional contexts, we seek to advance current understanding of CEO compensation dynamics and the functioning of CEO labor markets.