Market Forces and CEO Pay: Shocks to CEO Demand Induced by IPO Waves

Abstract

I develop a simple competitive equilibrium model and derive the prediction that CEO pay-size elasticity increases when more firms compete for an inelastic supply of managers. Using industry-level IPO waves as a proxy for increased competition for CEOs, I find that pay-size elasticity increases by 6% with a one-standard-deviation increase in IPO activity. This effect is stronger in specialized industries. In addition, increased IPO activity leads to a greater likelihood of executive transitions between firms. These findings indicate that market forces play a key role in the determination of CEO pay.

Keywords: Executive Compensation, Labor Markets

JEL Classification: G30, J3, M51, J41, J63