How do the Labor Market Values of Managerial Traits Evolve?

56 Pages Posted: 11 Jan 2015 Last revised: 26 Jul 2018

Si Li

Wilfrid Laurier University - School of Business & Economics

Marcos Fabricio Perez

Wilfrid Laurier University - School of Business & Economics

Multiple version iconThere are 2 versions of this paper

Date Written: July 15, 2018

Abstract

How do the labor market values of executives’ personal traits evolve over time? We propose and estimate an interactive fixed effects model, which allows for time-variant valuation of unobserved manager attributes. We find that managerial talent is the most important unobserved trait determining compensation. The pay premium based on each talent decile has significant time variation that co-moves with the stock market. Such pay premium is concentrated among top talented managers, with executives at the median level of talent earning $241,000 total pay premium and those at the top talent decile earning $1,136,000. We also identify a second economically important executive trait, and this trait is related to managerial cautiousness or risk aversion. The pay premium of this trait is linked to the time variation in the equity market risk premium, with cautiousness being discounted (compensated) during the low (high) risk premium period.

Keywords: Executive compensation, CEO pay, managerial ability, human capital, fixed effects, manager fixed effects, interactive fixed effects, factor models

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

Suggested Citation

Li, Si and Perez, Marcos Fabricio, How do the Labor Market Values of Managerial Traits Evolve? (July 15, 2018). Available at SSRN: https://ssrn.com/abstract=2547738 or http://dx.doi.org/10.2139/ssrn.2547738

Si Li (Contact Author)

Wilfrid Laurier University - School of Business & Economics ( email )

Waterloo, Ontario N2L 3C5
Canada

Marcos Fabricio Perez

Wilfrid Laurier University - School of Business & Economics ( email )

Waterloo, Ontario N2L 3C5
CANADA
519-884 0710 (Phone)
519-884 0201 (Fax)

HOME PAGE: http://www.public.asu.edu/~mfperez/

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