Firm Diversification and CEO Compensation: Managerial Ability or Executive Entrenchment?
AbstractData for a sample of 558 CEOs over 1985-1990 suggest substantial compensation premia for managers of diversified firms. The CEO of a firm with two distinct lines of business averages 10 to 12 percent more in salary and bonus and 13 to 17 percent more in total compensation than the CEO of a similar-sized but undiversified firm, all else equal. This corresponds to average 1990 salary gains of $115,000 to $145,000 per year for our sample. Diversification may raise pay because the CEO's job requires higher ability or because it is associated with CEO entrenchment. If ability explains the correlation, we would expect the diversification premium to be invariant to tenure. Entrenchment models suggest higher premia for more experienced (more entrenched) CEOs, and an increase in compensation when the CEO diversifies the firm. The data support an ability model over an entrenchment explanation. The diversification premium is unaffected by tenure, and increasing diversification reduces compensation for incumbent CEOs, all else equal.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4723.
Date of creation: Apr 1994
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Publication status: published as Rand Journal of Economics, Vol. 28, no. 3 (Autumn 1997): 489-514.
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- 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.
- L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
- G3 - Financial Economics - - Corporate Finance and Governance
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