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

54 Pages Posted: 4 Jun 2018 Last revised: 13 Nov 2019

See all articles by Shuo Xia

Shuo Xia

Halle Institute for Economic Research; Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE); University of Leipzig - Faculty of Economics and Management Science

Date Written: June 4, 2018

Abstract

Higher incentive pay is associated with higher firm value. I introduce a model of CEO-firm matching to disentangle the two confounding effects that drive this result. First, higher incentive pay directly induces more effort; second, talented CEOs sort into firms pay higher incentive pay. I find that both effects contribute to the result, with the selection effect accounting for almost one-quarter of the total effect. The relative importance of the selection effect is the largest in submarkets with high talent mobility and in more recent years.

Keywords: Selection Effect, Incentive Effect, Incentive Pay, Two-sided Matching, CEO Labor Market

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

University of Leipzig - Faculty of Economics and Management Science ( email )

Leipzig, 04109
Germany

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