Position, Power and Demand for CEOs: Understanding Executive Compensation in the U.S Market
27 Pages Posted: 9 Jun 2014
Date Written: June 8, 2014
It is hard to explain dramatic increase in executive compensation using existing theories based on power or position (Frydman and Jenter (2010)). We attempt to address this issue by using CEO promotion, as chairman of the board, as our identication strategy. CEO promotion is expected to have significant increase in both position and power hence it is easy to control any unobservable factors associated with power and position. We observe 32,033 CEO-years of publicly listed rms in the US market during the period 1996-2011 and find that, after controlling for observable position and power proxies, compensation of promoted CEOs, that is over and above their peer group CEO chairmen appointees, is mainly explained by contemporaneous peer group compensation shocks in CEO labor market. Our result suggests that market-specific peer group compensation in the U.S CEO labor market is more important determinant of executive compensation than firm-specific position or power. Our results have an important implication for recently introduced CEO-employee pay ratio regulation in the U.S market which uses firm-specific information that is attributed to power and position. Our results suggest that executive compensation is beyond their power and position and regulators should consider even CEO labor market forces.
Keywords: CEO compensation, CEO-chairman
JEL Classification: G38, L25
Suggested Citation: Suggested Citation