A STUDY OF CIOS' SELECTION, COMPENSATION, AND TURNOVER

Abstract

Implementation of the Sarbanes-Oxley Act and recovery in IT spending after the dot-com bust in 2002 have enhanced the Chief Information Officer's (CIO's) role and needed skills. The CIO significantly influences strategy implementation and firm performance through the management of IT resmyces. I posit that firms must appoint a CIO with an appropriate background (technical versus business) that is aligned with their strategic positioning (differentiation versus cost leadership) for IT resmyces to support the firm's strategy. I find that differentiators (cost leaders) are more likely to appoint a CIO with a technical (business) background. Notably, firms announcing aligned CIO appointments (technical CIOs for differentiators and business CIOs for cost leaders) have superior investor reactions. Second, I take the first step to understand the impact of CIO's education on determining their compensation. I find that CIO education characteristics are significant determinants of CIO compensation, addressing the ongoing debate regarding the desired CIO education. Furthermore, drawing on Agency theory, I separately examine salary and bonus due to their divergent roles in rewarding and incentivizing ability and effort. My findings suggest that CIO education characteristics strongly determine CIO salary whereas firm financial performance measures strongly determine CIO bonus, consistent with salary rewarding CIO ability and bonus incentivizing CIO effort. Third, I investigate the relationship between data breaches and Chief Information Officer (CIO) turnover. Executive turnover literature finds that CEOs and CFOs turnover when they fail to meet financial performance expectations. Unlike CEOs and CFOs, CIOs are directly responsible for IT performance and I argue that CIOs are more likely to turnover when they fail to meet their performance expectation as reflected by data breaches. Following previous work, I classify system breaches into system glitch, criminal attack, human error and other. I document that system glitches increase the likelihood of CIO turnover by two-fold. Furthermore, I find that the impact of system glitches on CIO turnover lasts for two years.