Firm Diversification and CEO Compensation: Managerial Ability Or Executive Entrenchment?, Issue 4723
National Bureau of Economic Research, 1994 - Chief executive officers - 43 pages
Data for a sample of 558 CEOs over 1985-1990 suggest substantial compensation premia for managers of diversified firms. The CEO of a firm with two distinct lines of business averages 10 to 12 percent more in salary and bonus and 13 to 17 percent more in total compensation than the CEO of a similar-sized but undiversified firm, all else equal. This corresponds to average 1990 salary gains of $115,000 to $145,000 per year for our sample. Diversification may raise pay because the CEO's job requires higher ability or because it is associated with CEO entrenchment. If ability explains the correlation, we would expect the diversification premium to be invariant to tenure. Entrenchment models suggest higher premia for more experienced (more entrenched) CEOs, and an increase in compensation when the CEO diversifies the firm. The data support an ability model over an entrenchment explanation. The diversification premium is unaffected by tenure, and increasing diversification reduces compensation for incumbent CEOs, all else equal
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accounting return Aln(Sales Asymptotic robust standard business segments CEO compensation CEO-years CEO's changes in compensation changes in diversification compensation and diversification compensation and firm compensation increases COMPUSTAT constant Descriptive Statistics DIVERSE coefficient DIVERSE increases diversification and compensation diversification effect diversification premia diversified and undiversified diversified firms earn entrenched managers errors in parentheses estimated diversification executive compensation experienced CEOs firm diversification firm performance firm's first-year CEOs fixed effects higher ability In(SALES increased diversification incumbent CEOs industry group industry segments Joskow lines of business managerial input managers marginal return market return matching model number component Number of Observations number of segments NUMSEG panel data percentage points point estimates positive correlation premium reported in column reported in Table return to ability robust standard errors salary and bonus sample period SDRET segment sales shareholder Shleifer and Vishny single segment firms specifications standard deviation suggest Table 7A TOTAL compensation variables variance of segment WTGROUP