Executive Compensation and the Market Valuation of Managerial Attributes
57 Pages Posted: 11 Jan 2015 Last revised: 21 Nov 2017
Date Written: October 27, 2017
What personal traits are important in determining executive compensation, and how firms value these personal traits over time? We propose and estimate an interactive fixed effects model, which allows for time-variant valuation of unobserved manager attributes. We find that two managerial attributes are economically important in explaining executive pay. The first captures general managerial talent and its market price co-moves with the stock market. The second attribute cannot be explained by the model of competition for scarce managerial talent or by managers’ ability to extract rents, and the market price of this attribute has dramatically increased since early 2000’s.
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
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