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CEO Incentives and Firm Size

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Author Info
George P. Baker (Harvard University and National Bureau of Economic Research)
Brian J. Hall (Harvard University and National Bureau of Economic Research)
Abstract

We develop a model that clarifies how to measure CEO incentive strength and how to reconcile the enormous differences in pay sensitivities between executives in large and small firms. The crucial parameter is shown to be the elasticity of CEO productivity with respect to firm size. We find that CEO marginal products rise significantly with firm size (confirming Rosen's conjecture that CEOs of large firms have a "chain letter" effect on firm performance), and overall CEO incentives are roughly constant, or decline slightly, with firm size. We employ a multitask model to discuss implications for the design of control systems.

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Publisher Info
Article provided by University of Chicago Press in its journal Journal of Labor Economics.

Volume (Year): 22 (2004)
Issue (Month): 4 (October)
Pages: 767-798
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Handle: RePEc:ucp:jlabec:v:22:y:2004:i:4:p:767-798

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  3. Jeffrey R. Brown & Nellie Liang & Scott Weisbenner, 2006. "Executive financial incentives and payout policy: firm responses to the 2003 dividend tax cut," Finance and Economics Discussion Series 2006-14, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  4. Lucian Bebchuk & Yaniv Grinstein, 2005. "Firm Expansion and CEO Pay," NBER Working Papers 11886, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  5. Xavier Gabaix & Augustin Landier, 2006. "Why Has CEO Pay Increased So Much?," NBER Working Papers 12365, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Fahlenbrach, Rudiger, 2008. "Shareholder Rights, Boards, and CEO Compensation," Working Paper Series 2008-5, Ohio State University, Charles A. Dice Center for Research in Financial Economics. [Downloadable!]
  7. Arantxa Jarque, 2008. "CEO compensation : trends, market changes, and regulation," Economic Quarterly, Federal Reserve Bank of Richmond, issue Sum, pages 265-300. [Downloadable!]
  8. Alex Edmans & Xavier Gabaix & Augustin Landier, 2007. "A Calibratable Model of Optimal CEO Incentives in Market Equilibrium," NBER Working Papers 13372, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Markus Baldauf & J.M.C. Santos Silva, 2009. "On the use of robust regression in econometrics," Economics Discussion Papers 664, University of Essex, Department of Economics. [Downloadable!]
  10. Josh Lerner & Julie Wulf, 2006. "Innovation and Incentives: Evidence from Corporate R&D," NBER Working Papers 11944, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  11. Anthony Marino & Jan Zabojnik, 2006. "Work-Related Perks, Agency Problems, and Optimal Incentive Contracts," Working Papers 1107, Queen's University, Department of Economics. [Downloadable!]
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  12. Fredrik Andersson & Matthew Freedman & John C. Haltiwanger & Julia Lane & Kathryn L. Shaw, 2006. "Reaching for the Stars: Who Pays for Talent in Innovative Industries?," NBER Working Papers 12435, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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