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

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

Dirk E. Black

Tuck School of Business at Dartmouth

Shane S. Dikolli

Duke University - Fuqua School of Business

Scott Dyreng

Duke University

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 S. 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

Tuck School of Business at Dartmouth ( email )

Hanover, NH 03755
United States
603-646-9635 (Phone)

Shane Sami Dikolli (Contact Author)

Duke University - Fuqua School of Business ( email )

100 Fuqua Drive
Box 90120
Durham, NC 27708-0120
United States
919-660-1949 (Phone)
919-869-1901 (Fax)

Scott Dyreng

Duke University ( email )

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

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