CEO Reputation: Who Benefits - the Firm or the CEO?

I examine the potential economic value of CEO reputation: performance improvement at the firm level and personal benefits to the CEO such as compensation and job retention. Two perspectives on CEO reputation offer different predictions regarding the benefits of CEO reputation. The ability perspective in the agency literature advocates the economic benefits of CEO reputation. The symbolic image perspective from recent CEO reputation studies, however, argues that CEO reputation does not necessarily improve firm performance or CEO job retention. I investigate which perspective is more consistent with empirical evidence. The results of firm performance tests show that CEOs with well-established reputations are able to sustain good firm performance but do not turn around poor performance. These results imply that stakeholders might have to consider replacing the CEO - no matter how highly regarded - with a turnaround specialist when a firm suffers financially. Another finding from job security tests shows that the reputations of CEOs in fact impair their job retention when they perform poorly. These results suggest that if CEOs want to ensure their job security, they should put more effort towards improving firm performance than towards promoting their own images in the media. Finally, the results of compensation tests report that CEO reputation increases pay-for-performance sensitivity.