How do the Labor Market Values of Managerial Traits Evolve?
56 Pages Posted: 11 Jan 2015 Last revised: 26 Jul 2018
Date Written: July 15, 2018
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
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