CEO Pay-for-Complexity and the Risk of Managerial Diversion from Multinational Diversification

59 Pages Posted: 17 Aug 2010 Last revised: 3 Sep 2012

See all articles by Dirk E. Black

Dirk E. Black

University of Nebraska at Lincoln - School of Accountancy

Shane S. Dikolli

Darden School of Business University of Virginia

Scott Dyreng

Duke University - Accounting

Date Written: August 31, 2012

Abstract

Prior studies find that CEOs receive higher pay if the enterprise is more complex because more complex enterprises are, in theory, matched with the managerial skills of higher-ability CEOs. While multinational diversification is typically a characteristic of enterprise complexity, we argue that multinational diversification also introduces a risk that executives will divert an enterprise’s resources to obtain private benefits. We first establish that CEO pay is, on average, increasing in the extent of multinational diversification, consistent with intuition that more complex enterprises are matched to higher‐ability CEOs. We then demonstrate that the CEO pay‐for‐complexity premium is lower if the multinational diversification reflects a relatively high risk of managerial diversion. For sufficiently high levels of multinational diversification accompanied by a high risk of managerial diversion, we find that CEOs receive a relative reduction in pay rather than a pay premium for multinational diversification. We also find evidence that this pay effect occurs in part through adjustments to a CEO’s pay‐for‐performance sensitivity.

Keywords: CEO compensation, diversification, complexity

JEL Classification: J31, J33

Suggested Citation

Black, Dirk E. and Dikolli, Shane Sami and Dyreng, Scott, CEO Pay-for-Complexity and the Risk of Managerial Diversion from Multinational Diversification (August 31, 2012). AAA 2011 Management Accounting Section (MAS) Meeting Paper. Available at SSRN: https://ssrn.com/abstract=1659353 or http://dx.doi.org/10.2139/ssrn.1659353

Dirk E. Black

University of Nebraska at Lincoln - School of Accountancy ( email )

307 College of Business Administration
Lincoln, NE 68588-0488
United States

Shane Sami Dikolli (Contact Author)

Darden School of Business University of Virginia ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
4342431018 (Phone)

Scott Dyreng

Duke University - Accounting ( email )

Box 90120, Fuqua School of Business
Durham, NC 27708-0120
United States

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