Employment Networks and the CEO Labor Market

Abstract

This paper looks at the influence of networks and connectedness on Chief Executive Officer (CEO) labor market outcomes. CEOs can establish direct connections with other executives and directors through overlapping professional experience, such as common directorships in companies. There are also second and higher degree connections established through indirect links of other linked executives or directors in the corporate community. I characterize CEOs’ positions on such networks and examine their consequences for CEO labor market. I construct measures that capture multiple aspects of connectedness and then test whether, how, and in what direction they affect the hiring of CEOs, CEO replacement, and the compensation paid to CEOs. Consistent with theories of social capital, I find that connected CEOs are more likely to depart from their current positions. A one standard deviation increase in the CEO’s connectedness measure leads to 1.44% higher probability of turnover. Connections also matter in the choice of a new CEO. Having a direct link to any of the board members boosts the probability of outside succession by 51.80%. Better-connected CEOs receive higher levels of compensation. A one standard deviation unit change in the new CEO’s connectedness measure increases a new CEO’s incentive pay by 10.62%, which is about an additional $560,869 for a new CEO receiving average level of compensation. Connections add to traditional turnover and compensation variables in economically significant ways.