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Firm Diversification and CEO Compensation: Managerial Ability or Executive Entrenchment?

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  • Nancy L. Rose
  • Andrea Shepard

Abstract

Investigating the relationship between CEO compensation and firm diversification over 1985-1990, we find that the CEO of a firm with two lines of business averages 13% more in salary and bonus than the CEO of a similar-sized but undiversified firm, ceteris paribus. We explore two potential explanations for this: the match of higher-ability CEOs with firms that are more difficult to manage, and the association of diversification with CEO entrenchment. The data are more consistent with ability matching: the premium is invariant to CEO tenure, and incumbents who diversify their firms earn less than newly hired CEOs at already-diversified firms.

Suggested Citation

  • 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.
    • Handle: RePEc:rje:randje:v:28:y:1997:i:autumn:p:489-514
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    References listed on IDEAS

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    JEL classification:

    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • G3 - Financial Economics - - Corporate Finance and Governance

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