The Economics of Super Managers

57 Pages Posted: 5 Dec 2006 Last revised: 14 May 2014

Nina Baranchuk

University of Texas at Dallas - Naveen Jindal School of Management

Glenn MacDonald

Washington University in St. Louis - John M. Olin Business School

Jun Yang

Indiana University - Kelley School of Business - Department of Finance

Date Written: July 16, 2010

Abstract

We study a competitive model in which firm managers differ in terms of ability, and the managers’ actions are private information. Each firm chooses how able a manager to hire, and optimizes the manager’s incentive pay as well as the level of cooperating resources available to the manager. Thus, firm size, managerial talent, and incentives are simultaneously determined in equilibrium. The model can be considered as an amalgam of agency and Superstars, in which the possibility to adjust incentives enhances the firm’s ability to provide a more talented manager with greater cooperating resources, and the ability to adjust cooperating resources enables better incentives. For example, the convexity of firm size as a function of the ability of the manager, the focus of the Superstars model, is increased when incentives are optimized. We study both a homogeneous firm model and a heterogenous firm extension, and find that our results are generally stronger when managers and firms match assortatively by managerial ability and firm productivity. The model delivers many testable implications. Some preliminary empirical results show the model is useful for understanding interesting compensation trends, e.g., CEO pay has recently become more closely associated with firm size. In the model, a closer association is the outcome of demand growth (and/or an inflow of workers). In the twelve Fama-French industries, the industries in which the association between CEO pay and size has increased are also those for which industry sales growth has been greater.

Keywords: CEO compensation, incentive pay, product market, labor market, equilibrium

JEL Classification: J33, G8, G32, G34, L11, M52

Suggested Citation

Baranchuk, Nina and MacDonald, Glenn and Yang, Jun, The Economics of Super Managers (July 16, 2010). AFA 2009 San Francisco Meetings Paper. Available at SSRN: https://ssrn.com/abstract=894276 or http://dx.doi.org/10.2139/ssrn.894276

Nina Baranchuk

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

Glenn M. MacDonald

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-7768 (Phone)
314-935-6359 (Fax)

HOME PAGE: http://www.olin.wustl.edu/faculty/macdonald/

Jun Yang (Contact Author)

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
812-855-3395 (Phone)
812-855-5875 (Fax)

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