Executive Pay, Talent and Firm Size
63 Pages Posted: 25 Aug 2008 Last revised: 29 Jan 2009
Date Written: October 6, 2008
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
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