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CEO Incentives and Firm Size

Author

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  • 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.

Suggested Citation

  • George P. Baker & Brian J. Hall, 2004. "CEO Incentives and Firm Size," Journal of Labor Economics, University of Chicago Press, vol. 22(4), pages 767-798, October.
  • Handle: RePEc:ucp:jlabec:v:22:y:2004:i:4:p:767-798
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    References listed on IDEAS

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