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

Abstract:     
Using several reputational, career, and educational credentials of CEOs for a panel of S&P 1,500 firms between 1993 and 2005, we show that over the last two decades boards have increasingly appointed CEOs with better credentials and rewarded them with a large pay premium. Newly-appointed CEOs earn an economically significant premium of about $280,000 of total pay per credential decile. Consistent with boards using credentials as publicly-observable signals of otherwise hard to gauge CEO skills, we show that the credentials pay premium displays key cross-sectional features predicted by market-based theories and is robust to controlling for firm and CEO fixed effects. Our findings provide direct evidence of a rising CEO talent premium over the last decades, which supports market-based, rather than moral hazard or managerial power based, explanations of the overall rise in CEO pay and the increasing inequality between the most and the least paid CEOs.

Number of Pages in PDF File: 64

Keywords: CEO pay, CEO Labor Market, CEO turnover

JEL Classification: G30

working papers series