Dynamics of CEO compensation: Old is gold

There is an ongoing debate regarding the hiring and compensation of younger versus older employees. In this paper, we examine this question for Chief Executive Officers (CEOs) in the context of the Sarbanes–Oxley Act (SOX) of 2002. We argue that the increased complexities in the post-SOX era (regulatory, technological, and the ever-changing business environment) have forced corporate boards to incentivize top executives for the increased burden. We contend that older CEOs are perceived as more reliable, efficient, and trustworthy (to fulfill the regulatory requirements demanded by SOX) than their younger counterparts. Consistent with our contention, we find that the total compensation of CEOs of U.S. firms has increased significantly for older CEOs as compared to their younger counterparts after the introduction of SOX. Our results are robust to sophisticated econometric techniques and also consistent with the logic that in order to motivate older CEOs (who would have raised substantial personal wealth over time) to keep working rather than retiring or moving to a competitor, their compensation package must be highly competitive.