43 Pages Posted: 25 Jan 2007 Last revised: 22 Feb 2009
Date Written: June 30, 2007
This paper presents an assignment model of CEOs and firms. The distributions of CEO pay levels and firms' market values are analyzed as the competitive equilibrium of a matching market where talents, as well as CEO positions, are scarce. It is shown how the observed joint distribution of CEO pay and market value can then be used to infer the economic value of underlying ability differences. The variation in CEO pay is found to be mostly due to variation in firm characteristics, whereas implied differences in managerial ability are small and make relatively little difference to shareholder value. The value-added of scarce CEO ability within the 1000 largest firms in the US was about $21-25 billion in 2004, of which the CEOs received about $4 billion as ability rents while the rest was capitalized into market values.
Keywords: executive compensation, income distribution, matching models
JEL Classification: D30, G30, J31
Suggested Citation: Suggested Citation
Terviö, Marko, Difference that CEOs Make: An Assignment Model Approach (June 30, 2007). American Economic Review, Vol. 98, No. 3, pp. 642-668, 2008. Available at SSRN: https://ssrn.com/abstract=958868 or http://dx.doi.org/10.2139/ssrn.958868