Managerial Attributes and Executive Compensation

Abstract

We study the role of firm- and manager-specific heterogeneities in executive compensation. We decompose the variation in executive compensation and find that time invariant firm and especially manager fixed effects explain a majority of the variation in executive pay. We then show that in many settings, it is important to include fixed effects to mitigate potential omitted variable bias. Furthermore, we find that compensation fixed effects are significantly correlated with management styles (i.e., manager fixed effects in corporate policies). Finally, the method used in the paper has a number of potential applications in financial economics.

Keywords: Executive compensation, CEO pay, latent managerial ability, human capital, fixed effects, manager fixed effects

JEL Classification: G3, G32, J24, J31, J33, C23