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
Date Written: August 29, 2016
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
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