Position, Power and Demand for CEOs: Understanding Executive Compensation in the U.S Market

51 Pages Posted: 30 Aug 2016 Last revised: 7 Feb 2017

See all articles by Vijaya B. Marisetty

Vijaya B. Marisetty

RMIT University; Financial Research Network (FIRN)

Hiroshi Osano

Kyoto University - Institute of Economic Research

Buvaneshwaran Venugopal

University of Central Florida - College of Business Administration

Multiple version iconThere are 2 versions of this paper

Date Written: August 29, 2016

Abstract

We extend Hayes and Schaefer (2009) model to derive testable hypotheses for the existence of the peer-group effect in the CEO labor market. Our model predicts higher growth in relative compensation for CEOs under higher firm-level productivity. The model also predicts increase in peer-group effect in the presence of investor myopia. We use CEO promotion to the dual role of CEO-Chairman as a control for discrete change in her power, primary determinant of compensation according to Managerial Power hypothesis (Bebchuk et al. (2002); Bebchuk and Fried (2004)), and position, primary determinant according to Optimal Contracting hypothesis (Rosen (1982); Grossman and Hart (1983)). We empirically test our model predictions using a difference-in-difference approach by comparing compensation histories of 979 U.S. CEOs who got promoted to CEO-Chairmen role during their tenure and nearest neighborhood peer CEOs who got directly appointed as CEO-Chairmen. Our results, after several robustness checks, are consistent with our model that peer-group effect in CEO labor market exists even after controlling for CEOs' power and position proxies.

Keywords: CEO Compensation, Managerial Power Hypothesis, Optimal Contracting Hypothesis

JEL Classification: G38, L25

Suggested Citation

Marisetty, Vijaya B. and Osano, Hiroshi and Venugopal, Buvaneshwaran, Position, Power and Demand for CEOs: Understanding Executive Compensation in the U.S Market (August 29, 2016). 2nd Annual Financial Institutions, Regulation and Corporate Governance Conference, Available at SSRN: https://ssrn.com/abstract=2831767 or http://dx.doi.org/10.2139/ssrn.2831767

Vijaya B. Marisetty

RMIT University ( email )

Business
Level 12, 239 Bourke Street
Melbourne, Victoria 3000
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Hiroshi Osano

Kyoto University - Institute of Economic Research ( email )

Yoshida-Honmachi
Sakyo-ku
Kyoto 606-8501
Japan
+81-75-753-7131 (Phone)
+81-75-753-7138 (Fax)

Buvaneshwaran Venugopal (Contact Author)

University of Central Florida - College of Business Administration ( email )

PO Box 161400
Orlando, FL 32816
United States

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