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Promotion, Turnover, and Compensation in the Executive Labor Market

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  • George‐Levi Gayle
  • Limor Golan
  • Robert A. Miller

Abstract

This paper develops a generalized Roy model with human capital accumulation, moral hazard, and career concerns. We identify and estimate the model with a large panel that matches data on publicly listed firms to information on their executives. The structural estimates obtained are used to decompose the firm‐size pay gap. We find that although total compensation and incentive pay increase with firm size, certainty‐equivalent pay decreases with firm size. In larger firms, and for more highly ranked executives, weaker signal quality about effort results in higher risk premiums. This risk premium accounts for roughly 80 percent of the firm‐size gap in total compensation. Larger firms are also willing to pay more than smaller ones to attract executives. Finally, the estimated coefficients on human capital accumulation from formal education and experience gained from different firms are individually significant, but their collective effect on firm‐size pay differentials nets out.

Suggested Citation

  • George‐Levi Gayle & Limor Golan & Robert A. Miller, 2015. "Promotion, Turnover, and Compensation in the Executive Labor Market," Econometrica, Econometric Society, vol. 83, pages 2293-2369, November.
  • Handle: RePEc:wly:emetrp:v:83:y:2015:i::p:2293-2369
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    Cited by:

    1. Farzan Yahya & Zahiruddin B. Ghazali, 2017. "Effectiveness of board governance and dividend policy as alignment mechanisms to firm performance and CEO compensation," Cogent Business & Management, Taylor & Francis Journals, vol. 4(1), pages 1398124-139, January.
    2. Cziraki, Peter & Jenter, Dirk, 2021. "The Market for CEOs," CEPR Discussion Papers 16281, C.E.P.R. Discussion Papers.
    3. Page, T. Beau, 2018. "CEO attributes, compensation, and firm value: Evidence from a structural estimation," Journal of Financial Economics, Elsevier, vol. 128(2), pages 378-401.
    4. Braz Camargo & Elena Pastorino & Fabian Lange, 2018. "Earnings Dynamics: the Role of Learning, Human Capital, and Performance Incentives," 2018 Meeting Papers 581, Society for Economic Dynamics.
    5. Alex Edmans & Xavier Gabaix, 2016. "Executive Compensation: A Modern Primer," Journal of Economic Literature, American Economic Association, vol. 54(4), pages 1232-1287, December.
    6. Andrés Hincapié, 2020. "Entrepreneurship Over The Life Cycle: Where Are The Young Entrepreneurs?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 61(2), pages 617-681, May.
    7. Khorunzhina, Natalia & Miller, Robert A., 2019. "American Dream Delayed: Shifting Determinants of Homeownership," Working Papers 7-2019, Copenhagen Business School, Department of Economics.
    8. Sebastian Galiani & Juan Pantano, 2021. "Structural Models: Inception and Frontier," NBER Working Papers 28698, National Bureau of Economic Research, Inc.
    9. Andres Hincapie, 2019. "Entrepreneurship over the Life Cycle: Where are the Young Entrepreneurs?," 2019 Meeting Papers 735, Society for Economic Dynamics.
    10. Borys Grochulski & Yuzhe Zhang, 2017. "Market‐Based Incentives," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 58(2), pages 331-382, May.
    11. Jeremy Bertomeu & Edwige Cheynel & Michelle Liu‐Watts, 2018. "Are the Fama French factors treated as risk? Evidence from CEO compensation," European Financial Management, European Financial Management Association, vol. 24(5), pages 728-774, November.
    12. Arcidiacono, Peter & Miller, Robert A., 2020. "Identifying dynamic discrete choice models off short panels," Journal of Econometrics, Elsevier, vol. 215(2), pages 473-485.

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