Was Adam Smith Right? Evidence of Compensating Differential in CEO Pay

24 Pages Posted: 19 Jan 2016

Date Written: January 2016

Abstract

This paper estimates the compensating differential in CEO pay for the increasing risk of dismissal using contracted severance pay eligibility of the CEO as the main instrument. US CEOs receive a 3 per cent premium in pay for each percentage point increase in the risk of dismissal. In pointing to the dismissal risk as a determinant of CEO pay, these findings contribute to the debate on the recent growth in CEO pay and the potential impacts of governance reforms.

Suggested Citation

HomRoy, Swarnodeep, Was Adam Smith Right? Evidence of Compensating Differential in CEO Pay (January 2016). The Manchester School, Vol. 84, Issue 1, pp. 1-24, 2016, Available at SSRN: https://ssrn.com/abstract=2717160 or http://dx.doi.org/10.1111/manc.12086

Swarnodeep HomRoy (Contact Author)

University of Groningen ( email )

Nettlebosje 2
Department of Economics, Econometrics and Finance
Groningen, Groningen 9747 AE
Netherlands

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