Selection Versus Incentives in Incentive Pay: Evidence from a Matching Model

44 Pages Posted: 4 Jun 2018 Last revised: 1 Oct 2019

See all articles by Shuo Xia

Shuo Xia

Halle Institute for Economic Research; Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Date Written: June 4, 2018

Abstract

Higher incentive pay is associated with better firm performance. I introduce a model of CEO-firm matching to disentangle the two confounding effects that drive this result. On one hand, higher incentive pay directly induces more effort; on the other hand, higher incentive pay indirectly attracts more talented CEOs. I find both effects are essential to explain the result, with the selection effect accounting for 12.7% of the total effect. The relative importance of the selection effect is the largest in industries with high talent mobility and in more recent years.

Suggested Citation

Xia, Shuo, Selection Versus Incentives in Incentive Pay: Evidence from a Matching Model (June 4, 2018). Available at SSRN: https://ssrn.com/abstract=3190685 or http://dx.doi.org/10.2139/ssrn.3190685

Shuo Xia (Contact Author)

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

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