Organization Science Vol. 19, No. 3, May–June 2008, pp. 457–474 issn 1047-7039  eissn 1526-5455  08  1903  0457 inf orms ® doi 10.1287/orsc.1080.0354 © 2008 INFORMS The Impact of CEO Status Diffusion on the Economic Outcomes of Other Senior Managers Scott D. Graffin University of Georgia, Athens, Georgia 30602, sgraffin@terry.uga.edu James B. Wade McDonough School of Business, Georgetown University, Washington, D.C. 20057, jbw42@georgetown.edu Joseph F. Porac Kaufman Management Center, New York University, New York, New York 10012, jporac@stern.nyu.edu Robert C. McNamee Rutgers Business School, Newark, New Jersey 07102, rmcnamee@andromeda.rutgers.edu I n this paper we develop and test predictions regarding the impact of CEO status on the economic outcomes of top management team members. Using a unique data set incorporating Financial World’s widely publicized CEO of the Year contest, we found that non-CEO top management team members received higher pay when they worked for a high-status CEO. However, star CEOs themselves retained most of the compensation benefits. We also show that there is a “burden of celebrity” in that the above relationships were contingent on how well a firm performs. Last, we found that, when compared with the subordinates of less-celebrated CEOs, members of top management teams who worked for star CEOs were more likely to become CEOs themselves through internal or external promotions. Key words : CEO celebrity; status; top management team; compensation; status leakage Introduction Understanding how senior managers are compensated has become a central question in research on corpo- rate governance. Most prior compensation research has examined how company directors evaluate a CEO in iso- lation of other members of the top management team (e.g., Bebchuk and Fried 2004). Much of this research has been motivated by agency theory (Berle and Means 1932, Jensen and Meckling 1976) and its emphasis on the alignment of incentives between CEOs and their company’s shareholders. Yet governance scholars have recognized for some time that managerial performance is group based and that task interdependencies exist within top management teams that make it difficult to evalu- ate a CEO without also considering the contributions of other senior managers (e.g., Hambrick and Mason 1984, Holmstrom 1982). This interdependence complicates a purely agency perspective on top management compen- sation because it introduces evaluative uncertainty into the contracting process (Holmstrom 1979, 1982). Agency theory offers two types of top management monitoring mechanisms: behavior-based and outcome- based contracts. Behavior-based contracts are effective when the appropriate behavior of agents performing a task can be specified ex ante. This is not the case in the context of monitoring top management teams because the duties of team members are open ended and not eas- ily programmed. Agency theory also recognizes that it is difficult to write outcome-based contracts when there are both joint production and uncertainty regarding the link between specific managerial behaviors and firm out- comes (Eisenhardt 1989). Nilakant and Rao (1994) sug- gested that under such conditions: there is considerable ambiguity in the task that is dele- gated to the agent(s) and multiple criteria of performance may be used to monitor and reward the agent(s). Such conditions are not easily amenable to mathematical mod- eling, and, consequently, have been ignored by agency theory. (p. 657) Holmstrom (1979) examined this issue and concluded that when the relative performance of an agent is difficult to assess, additional information, even if imperfect, can improve monitoring effectiveness. Economic sociolo- gists have argued that one source of information about firms and managers is the opinion of informed third parties such as security analysts and the business press (Zuckerman 1999, Podolny 2005). Through their public endorsements or repudiations, expert third parties create an informational context in which the actions of firms and managers are often explained. Consistent with this argument, a number of scholars have recently shown that media coverage influences firm profitability (e.g., Deephouse 2000), the premiums paid for initial public stock offerings (Pollock and Rindova 2003), and abnor- mal stock returns (Johnson et al. 2005, Wade et al. 2006b). At the managerial level, positive media cover- age of the CEO has been associated with increased CEO compensation (Malmendier and Tate 2005a, Wade et al. 457 INFORMS holds copyright to this article and distributed this copy as a courtesy to the author(s). Additional information, including rights and permission policies, is available at http://journals.informs.org/.