Firm-Manager Match and Executive Compensation

Posted: 13 Nov 2017 Last revised: 10 Sep 2020

See all articles by Matthew Ma

Matthew Ma

Southern Illinois University at Carbondale

Jing Pan

Southern Methodist University

Xue Wang

Ohio State University - Fisher College of Business

Date Written: September 1, 2017

Abstract

We investigate the importance of firm-manager match effects in explaining top executive compensation. Based on a three-way mixed effect model that has been widely applied in recent labor economics studies, our analysis includes time-invariant random effects at the firm, manager and firm-manager level as determinants of executive pay. We find that 11% of the variation in executive pay is explained by firm-manager match effects, while manager effects explain 9% of the variation in executive pay. The results imply that a sizeable proportion of what was previously identified as manager effects is in fact match effects. In addition, consistent with compensation match effects capturing the compensation consequences of match-specific productivity, we find that (1) the market reacts more negatively to deaths of CEOs with higher match effects, and (2) CEOs with smaller match effects are more likely to leave the office. Furthermore, we find that match effects are positively related to two firm-manager complementarities: (1) firm size and managerial talent, and (2) diversification and general management ability. Finally, we show that compensation match effects are significantly correlated to match effects in firm performance and corporate policies.

Keywords: executive compensation, firm-manager match, match effects, mixed effects model

JEL Classification: G30, G32, J24, J31, J33, C23

Suggested Citation

Ma, Matthew and Pan, Jing and Wang, Xue, Firm-Manager Match and Executive Compensation (September 1, 2017). Available at SSRN: https://ssrn.com/abstract=3067808 or http://dx.doi.org/10.2139/ssrn.3067808

Matthew Ma

Southern Illinois University at Carbondale ( email )

Rehn Hall - Mail Code 4626
Carbondale, IL Illinois 62901-4515
United States

Jing Pan (Contact Author)

Southern Methodist University ( email )

Cox School of Business
6212 Bishop Blvd
Dallas, TX 75275
United States

Xue Wang

Ohio State University - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-688-1330 (Phone)
614-292-2118 (Fax)

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