Managerial Capital and the Market for CEOs
Kevin J. Murphy
University of Southern California - Marshall School of Business; University of Southern California - Department of Economics; USC Gould School of Law
Queen's University - Department of Economics
This paper reconciles three pronounced trends in U.S. corporate governance: the increase in pay levels for top executives, the increasing prevalence of appointing CEOs through external hiring rather than internal promotions, and the increased prevalence of hiring outside CEOs with prior experience as CEOs. We propose that these trends reflect a shift in the relative importance of "managerial ability" (CEO skills transferable across companies) and "firm-specific human capital" (valuable only within the organization). We show that if the supply of workers in the corporate sector is relatively elastic, an increase in the relative importance of managerial ability leads to fewer promotions, more external hires, and an increase in equilibrium average wages for CEOs. We test our model using CEO pay and turnover data from 1970 to 2000. We show that CEO compensation is higher for CEOs hired from outside their firm, and for CEOs in industries where outside hiring is prevalent.
Number of Pages in PDF File: 50
Keywords: Executive Compensation, Executive Turnover, Human Capital, Matching, Firm-specific capial, managerial labor market
JEL Classification: J41, J44, G3, J31, J33
Date posted: May 8, 2007
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