Which Skills Matter in the Market for CEOs? Evidence from Pay for CEO Credentials

Abstract

Market-based theories predict that differences in CEO skills lead to potentially large differences in pay, but it is challenging to quantify the CEO skill premium in pay. In a first step toward overcoming this empirical challenge, we code detailed biographical information on a large sample of CEOs for a panel of S&P 1,500 firms between 1993 and 2005 to identify specific reputational, career, and educational credentials that are indicative of skills. Newly-appointed CEOs earn up to a 5% or $280,000 total pay premium per credential decile, which is concentrated among CEOs with better reputational and carreer credentials, those with the very best credentials, and those who run large firms. Consistent with the unique economic mechanism of market-based theories, CEO credentials have a positive impact on firm performance. The performance differential for newly-appointed CEOs is up to 0.5% per credential decile, and is also concentrated among CEOs with better reputational and career credentials and those at large firms. Credentials are positively correlated with unoberved CEO heterogeneity in pay and performance, which further validates our hypothesis that boards use them as publicly-observable signals of otherwise hard to gauge CEO skills. In all, our results offer direct evidence in support of market-based explanations of the overall rise in CEO pay.

Keywords: CEO pay, CEO labor market, CEO turnover

JEL Classification: G30