Managerial Attributes and Executive Compensation

Abstract:     
We study the role of firm- and manager-specific heterogeneities in executive compensation. We decompose the variation in executive compensation into time variant and invariant firm and manager components and find that time invariant firm and especially manager fixed effects explain a majority of the variation in executive pay. In addition, we show that including fixed effects alters coefficients and interpretations of other variables. We also find that firm performance improves after CEOs with larger compensation fixed effects are hired, which is consistent with the fixed effect being associated with innate managerial ability or social capital, which in turn leads to better performance. We further explore managerial excess compensation by purging time variant effects and firm, manager, and year fixed effects, and show that firms with over-paid managers adopt financial structures that increase job security.

Keywords: Executive compensation, CEO pay, latent managerial ability, human capital, fixed effects, manager fixed effects, capital structure

JEL Classifications: G3, G32, J24, J31, J33, C23

Working Paper Series