Executive Pay, Talent and Firm Size

62 Pages Posted: 13 Aug 2008 Last revised: 23 Jan 2009

See all articles by Jaeyoung Sung

Jaeyoung Sung

Ajou University

Peter L. Swan

University of New South Wales (UNSW Sydney; Financial Research Network (FIRN)

Multiple version iconThere are 2 versions of this paper

Date Written: January 20, 2009

Abstract

We present an integrated agency model of career concerns and labor market equilibrium. Unlike the existing literature, our managerial reservation utility levels and thus pay levels are endogenously determined, and managers with higher expected talent levels are not necessarily hired by large firms. A number of our theoretical results are supported by our empirical analysis utilizing our multi-period career-concerns model. We find that that CEOs employed by large firms have higher talent levels and are recruited from "tighter" talent distributions. We show that CEOs employed in larger firms are more productive due to scale economies in effort and more notably in talent. Talent is rewarded via both higher pay and CEO income from shareholdings. The model very accurately predicts firm performance and out of sample and also CEO pay levels. Finally, a sizeable portion of the increased real CEO pay levels over recent decades is explicable as compensation for sizeable increases in assets under management as well as for much higher risk.

Keywords: executive pay, firm size, career concern, CEO talent, principal-agent, optimal contract

JEL Classification: G34, J41, J44, L25

Suggested Citation

Sung, Jaeyoung and Swan, Peter Lawrence, Executive Pay, Talent and Firm Size (January 20, 2009). Available at SSRN: https://ssrn.com/abstract=1222702 or http://dx.doi.org/10.2139/ssrn.1222702

Jaeyoung Sung

Ajou University ( email )

Woncheon-dong, Yeongtong-gu
Suwon-si, Gyeonggi-do
Korea, Republic of (South Korea)

Peter Lawrence Swan (Contact Author)

University of New South Wales (UNSW Sydney ( email )

School of Banking and Finance
UNSW Business School
Sydney NSW, NSW 2052
Australia
+61 2 9385 5871 (Phone)
+61 2 9385 6347 (Fax)

HOME PAGE: http://https://www.business.unsw.edu.au/our-people/peterswan

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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