Firm-Manager Match and Executive Compensation
Posted: 13 Nov 2017 Last revised: 10 Sep 2020
Date Written: September 1, 2017
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
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