CEO pay and the market for CEOs
AbstractCompetitive sorting models of the CEO labor market (e.g., Edmans, Gabaix and Landier (2009)) predict that differences in CEO productive abilities, or "talent", should be an important determinant of CEO pay. However, measuring CEO talent empirically represents a major challenge. In this paper, we document reliable evidence of pay for CEO credentials and argue that the evidence is consistent with models of the CEO labor market. Our main finding is that boards' compensation decisions reward several reputational, career, and educational credentials of CEOs, with newly-appointed CEOs earning a 5 percent ($280,000) total pay premium for each decile improvement in the distribution of these credentials. Consistent with boards using credentials as publicly-observable signals of CEO abilities, we show that pay for credentials displays key cross-sectional features predicted by theory, such as convexity in credentials and complementarity with firm size. Our main finding is robust to a battery of identification tests that address selectivity and endogeneity concerns, including instrumental variables estimates and controlling for firm and CEO fixed effects. We also show that credentials capture variation in CEO human capital that is different from lifetime work experience, and are positively related to long-term firm performance and board monitoring, which helps to distinguish our results from alternative stories based on CEO general human capital, hype, and entrenchment. Overall, our findings suggest that sorting considerations in the CEO labor market are an important determinant of CEO pay. Our results also suggest that the rise in CEO pay over the last decades may owe at least in part to a rise in the CEO talent premium.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 2012-39.
Date of creation: 2012
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-07-14 (All new papers)
- NEP-BEC-2012-07-14 (Business Economics)
- NEP-HRM-2012-07-14 (Human Capital & Human Resource Management)
- NEP-LAB-2012-07-14 (Labour Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Becker, Bo & Cronqvist, Henrik & Fahlenbrach, Rudiger, 2008.
"Estimating the Effects of Large Shareholders Using a Geographic Instrument,"
Working Paper Series
2008-9, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
- Becker, Bo & Cronqvist, Henrik & Fahlenbrach, Rüdiger, 2011. "Estimating the Effects of Large Shareholders Using a Geographic Instrument," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 46(04), pages 907-942, September.
- Bo Becker & Henrik Cronqvist & Rüdiger Fahlenbrach, 2011. "Estimating the Effects of Large Shareholders Using a Geographic Instrument," NBER Working Papers 17393, National Bureau of Economic Research, Inc.
- Bo Becker & Henrik Cronqvist & Rüdiger Fahlenbrach, 2009. "Estimating the Effects of Large Shareholders Using a Geographic Instrument," Harvard Business School Working Papers 10-028, Harvard Business School, revised Feb 2010.
- Becker, Bo & Cronqvist, Henrik & Fahlenbrach, Rüdiger, 2008. "Estimating the Effects of Large Shareholders Using a Geographic Instrument," SIFR Research Report Series 64, Institute for Financial Research.
- Carola Frydman & Dirk Jenter, 2010.
CESifo Working Paper Series
3277, CESifo Group Munich.
- Xavier Gabaix & Augustin Landier, 2006.
"Why Has CEO Pay Increased So Much?,"
NBER Working Papers
12365, National Bureau of Economic Research, Inc.
- Gabaix, Xavier & Landier, Augustin, 2008. "Why Has CEO Pay Increased So Much?," Open Access publications from University of Toulouse 1 Capitole http://neeo.univ-tlse1.fr, University of Toulouse 1 Capitole.
- Xavier Gabaix & Augustin Landier, 2006. "Why Has CEO Pay Increased So Much?," 2006 Meeting Papers 518, Society for Economic Dynamics.
- Harman, Harry H., 1976. "Modern Factor Analysis," University of Chicago Press Economics Books, University of Chicago Press, edition 3, number 9780226316529.
- Lawrence F. Katz & Kevin M. Murphy, 1991.
"Changes in Relative Wages, 1963-1987: Supply and Demand Factors,"
NBER Working Papers
3927, National Bureau of Economic Research, Inc.
- Katz, Lawrence F & Murphy, Kevin M, 1992. "Changes in Relative Wages, 1963-1987: Supply and Demand Factors," The Quarterly Journal of Economics, MIT Press, vol. 107(1), pages 35-78, February.
- Katz, L.F. & Murphy, K.M., 1991. "Changes in Relative Wages, 1963-1987: Supply and Demand Factors," Harvard Institute of Economic Research Working Papers 1580, Harvard - Institute of Economic Research.
- Guadalupe, Maria, 2004.
"Product Market Competition, Returns to Skill and Wage Inequality,"
CEPR Discussion Papers
4434, C.E.P.R. Discussion Papers.
- Maria Guadalupe, 2007. "Product Market Competition, Returns to Skill, and Wage Inequality," Journal of Labor Economics, University of Chicago Press, vol. 25, pages 439-474.
- Guadalupe, Maria, 2005. "Product Market Competition, Returns to Skill and Wage Inequality," IZA Discussion Papers 1556, Institute for the Study of Labor (IZA).
- María Guadalupe, 2005. "Product Market Competition Returns to Skill and Wage Inequality," CEP Discussion Papers dp0686, Centre for Economic Performance, LSE.
- John R. Graham & Si Li & Jiaping Qiu, 2011. "Managerial Attributes and Executive Compensation," NBER Working Papers 17368, National Bureau of Economic Research, Inc.
- Jenter, Dirk & Kanaan, Fadi, 2008.
"CEO Turnover and Relative Performance Evaluation,"
1992, Stanford University, Graduate School of Business.
- Cesare Fracassi & Geoffrey Tate, 2012. "External Networking and Internal Firm Governance," Journal of Finance, American Finance Association, vol. 67(1), pages 153-194, 02.
- Kevin J. Stiroh, 2001.
"Information technology and the U.S. productivity revival: what do the industry data say?,"
115, Federal Reserve Bank of New York.
- Kevin J. Stiroh, 2002. "Information Technology and the U.S. Productivity Revival: What Do the Industry Data Say?," American Economic Review, American Economic Association, vol. 92(5), pages 1559-1576, December.
- Marko Tervio, 2008. "The Difference That CEOs Make: An Assignment Model Approach," American Economic Review, American Economic Association, vol. 98(3), pages 642-68, June.
- Robert C. Feenstra & John Romalis & Peter K. Schott, 2002. "U.S. Imports, Exports, and Tariff Data, 1989-2001," NBER Working Papers 9387, National Bureau of Economic Research, Inc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Kris Vajs) The email address of this maintainer does not seem to be valid anymore. Please ask Kris Vajs to update the entry or send us the correct address.
If references are entirely missing, you can add them using this form.