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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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    File URL: http://socserv.mcmaster.ca/econ/rsrch/papers/archive/2016-04.pdf
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    References listed on IDEAS

    as
    1. George-Levi Gayle & Limor Golan & Robert A. Miller, "undated". "Promotion, Turover and Compensation in the Executive Market," GSIA Working Papers 2008-E32, Carnegie Mellon University, Tepper School of Business.
    2. James A. Mirrlees, 1976. "The Optimal Structure of Incentives and Authority Within an Organization," Bell Journal of Economics, The RAND Corporation, vol. 7(1), pages 105-131, Spring.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Pre-CEO Executive Skill Accumulation; CEO Pay Limits; Firm-CEO matching;

    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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