Firm Diversification and CEO Compensation: Managerial Ability Or Executive Entrenchment?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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Firm Diversification and Ceo Compensation: Managerial Ability Or Executive ... Nancy L. Rose No preview available - 2017 |
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accounting return Aln(Sales Asymptotic robust standard average business segments CEO compensation CEO-years CEO's CEOs diversify changes in compensation changes in diversification compensation and firm compensation increases COMPUSTAT constant Descriptive Statistics DIVERSE coefficient diversification and compensation diversification effect diversification premia 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 founder higher ability higher compensation In(Salary & Bonus In(SALES increasing diversification incumbent CEOs industry group industry segments Joskow lines of business managerial input managers marginal return market return matching model Number of Observations number of segments NUMSEG panel data percentage points point estimates positive correlation premium regressions include reported in column reported in Table reported segment 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 WTGROUP