Executive Pay, Talent and Firm Size

Sung, Jaeyoung; Swan, Peter L.

doi:10.2139/ssrn.1250742

Executive Pay, Talent and Firm Size

21st Australasian Finance and Banking Conference 2008 Paper

63 Pages Posted: 25 Aug 2008 Last revised: 29 Jan 2009

See all articles by Jaeyoung Sung

Peter L. Swan

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

There are 2 versions of this paper

Date Written: October 6, 2008

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 their pay levels are endogenously determined, and managers with high expected talent levels are not necessarily hired by large firms. A number of our theoretical results are supported by our panel data for 1992-2006 exclusive of time factors, which strikingly suggest that the average talent level of small firm CEOs is only slightly lower than that of large firm CEOs, but the talent variability of small firm CEOs is far greater than that of large firms. Moreover, a remarkable 55% of CEO-years indicate negative (real) productivity; and a sizeable portion of the increased real CEO pay levels in terms of higher productivity is attributable to both firm size and compensation for risk.

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

JEL Classification: G34, J41, J44, L25

Suggested Citation: Suggested Citation

Sung, Jaeyoung and Swan, Peter Lawrence, Executive Pay, Talent and Firm Size (October 6, 2008). 21st Australasian Finance and Banking Conference 2008 Paper. Available at SSRN: https://ssrn.com/abstract=1250742 or http://dx.doi.org/10.2139/ssrn.1250742