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Pre-CEO Executive Skill Accumulation and Firm-CEO Matching with Pay Limits

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  • Seungjin Han

Abstract

CEO jobs have increasingly emphasized general executive rather than firm-specific skill. Executives therefore have high stakes riding on executive skill accumulated in their non-CEO executive positions in order to establish themselves as talented before being on the competitive CEO market. This paper shows the far-reaching impact of CEO pay limits in an assignment model augmented by costly pre-CEO executive skill accumulation on the job. If the CEO pay limit is so severe that the minimum pay cut required for the highest-paid CEO is more than the lowest-paid CEO's expected pay net of her cost of working as a CEO, then it induces an equilibrium CEO pay function discontinuous at the top. This distorts high ability executives' equilibrium skill accumulation and results in a discontinuous bunching even prior to being on the CEO market. It may redistribute earnings from CEOs to shareholders only at the low-end of firm-CEO matches, given the distorted executive skill distribution.

Suggested Citation

  • Seungjin Han, 2016. "Pre-CEO Executive Skill Accumulation and Firm-CEO Matching with Pay Limits," Department of Economics Working Papers 2016-04, McMaster University.
    • Handle: RePEc:mcm:deptwp:2016-04
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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