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CEO Pay with Perks

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  • Andrew Carrothers
  • Seungjin Han
  • Jiaping Qiu

Abstract

This paper develops an equilibrium matching model for a competitive CEO market in which CEOs’ wage and perks are both endogenously determined by bargaining between firms and CEOs. In stable matching equilibrium, firm size, wage, perks and talent are all positively related. Perks are more sensitive than wage to changes in firm size if there are economies of scale in the cost of providing perks. Productivity-related perks provide common value by increasing both the CEO’s productivity and utility while non productivity-related perks provide private value by increasing the CEO’s utility only. The more perks enhance the CEO’s productivity, the faster perks increase in firm size. We test the predictions of the model using information on CEO wage and perks for S&P 500 companies and find consistent empirical evidence.

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Bibliographic Info

Paper provided by McMaster University in its series Department of Economics Working Papers with number 2012-05.

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Length: 51 pages
Date of creation: May 2012
Date of revision:
Handle: RePEc:mcm:deptwp:2012-05

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Keywords: matching; perks; executive compensation; private benefits;

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References

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  1. Rajan, Raghuram G. & Wulf, Julie, 2006. "Are perks purely managerial excess?," Journal of Financial Economics, Elsevier, Elsevier, vol. 79(1), pages 1-33, January.
  2. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, Elsevier, vol. 3(4), pages 305-360, October.
  3. Patrick Legros & Andrew F. Newman, 2003. "Beauty is a Beast, Frog is a Prince: Assortative Matching with Nontransferabilities," Economics Working Papers, Institute for Advanced Study, School of Social Science 0030, Institute for Advanced Study, School of Social Science.
  4. Xavier Gabaix & Augustin Landier, 2006. "Why Has CEO Pay Increased So Much?," NBER Working Papers 12365, National Bureau of Economic Research, Inc.
  5. Nancy L. Rose & Andrea Shepard, 1997. "Firm Diversification and CEO Compensation: Managerial Ability or Executive Entrenchment?," RAND Journal of Economics, The RAND Corporation, vol. 28(3), pages 489-514, Autumn.
  6. Paul A. Gompers & Joy L. Ishii & Andrew Metrick, 2002. "Corporate Governance and Equity Prices," Center for Financial Institutions Working Papers, Wharton School Center for Financial Institutions, University of Pennsylvania 02-32, Wharton School Center for Financial Institutions, University of Pennsylvania.
  7. Fama, Eugene F, 1980. "Agency Problems and the Theory of the Firm," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 88(2), pages 288-307, April.
  8. John R. Graham & Si Li & Jiaping Qiu, 2012. "Managerial Attributes and Executive Compensation," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 25(1), pages 144-186.
  9. Core, John E. & Guay, Wayne & Larcker, David F., 2008. "The power of the pen and executive compensation," Journal of Financial Economics, Elsevier, Elsevier, vol. 88(1), pages 1-25, April.
  10. King, Tao-Hsien Dolly & Wen, Min-Ming, 2011. "Shareholder governance, bondholder governance, and managerial risk-taking," Journal of Banking & Finance, Elsevier, Elsevier, vol. 35(3), pages 512-531, March.
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