CEO contract design : how do strong principals do it?

We study changes in the design of CEO contracts when firms transition from being public with dispersed ownership to being private with strong principals in the form of private equity sponsors. These principals redesign many, but far from all, contract features. There is no evidence that they find it optimal to reduce base salaries, bonuses, and perquisites, but they redesign contracts away from earnings-based and nonfinancial measures. They do not change CEO severance cash pay, but they redesign contracts so that unvested equity is forfeited by terminated CEOs, and they restrict the resale market for equity. CEO contracts are also redesigned so that a significant portion of equity grants performance-vests based on prespecified measures. Even financially savvy principals use subjective performance evaluation, timevesting equity, do not use premium options, and do not condition vesting on relative industry performance. We compare the actual CEO contracts in our sample to predictions from contracting theories, and relate our results to recent discussions of executive compensation reform. LBOs, employment contracts, contracting theory, executive compensation