We consider a model of chief executive officer (CEO) selection, dismissal, and retention. Firms with larger blockholder ownership monitor more; they get more information about CEO ability, which facilitates the dismissal of low-ability CEOs. These firms are matched with CEOs whose ability is more uncertain. For retention purposes, the compensation of these CEOs is more sensitive to firm value and relatively less sensitive to business conditions. Moreover, these CEOs receive lower salaries when CEO skills are sufficiently transferable. A diffusion of best monitoring practices increases competition for CEOs and raises CEO pay in all firms, including those with unchanged monitoring ability.

This paper studies the value of more precise signals on agent performance in an optimal contracting model with endogenous effort. With limited liability, the agent’s wage is increasing in output only if output exceeds a threshold, else it is zero regardless of output. If the threshold is sufficiently high, the agent only beats it, and is rewarded for increasing output through greater effort, if there is a high noise realization. Thus, a fall in output volatility reduces effort incentives—information and effort are substitutes—offsetting the standard effect that improved information lowers the cost of compensation. We derive conditions relating the incentive effect to the underlying parameters of the agency problem.