CEO contract design: How do strong principals do it?

Henrik Cronqvist, Rüdiger Fahlenbrach

Research output: Contribution to journalArticlepeer-review

18 Scopus citations


We study changes in chief executive officer (CEO) contracts when firms transition from public ownership with dispersed owners to private ownership with strong principals in the form of private equity sponsors. The most significant changes are that a significant portion of equity grants performance-vests based on prespecified measures and that unvested equity is forfeited by fired CEOs. Private equity sponsors do not reduce base salaries, bonuses, and perks, but redesign contracts away from qualitative measures. They use some subjective performance evaluation, do not use indexed or premium options, and do not condition vesting on relative industry performance. We compare the contracts to predictions from contracting theories, and relate our results to discussions of executive compensation reform.

Original languageEnglish (US)
Pages (from-to)659-674
Number of pages16
JournalJournal of Financial Economics
Issue number3
StatePublished - Jun 2013
Externally publishedYes


  • Contracting theory
  • Employment contracts
  • Executive compensation
  • LBOs

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management


Dive into the research topics of 'CEO contract design: How do strong principals do it?'. Together they form a unique fingerprint.

Cite this