Compensation and the Executive Labor Market

This project examines managers’ idiosyncratic differences but focuses on the aggregate labor market level for top managers. First, we document the earnings patterns of a large sample of U.S. executives and then turn to empirically investigating their sources. Specifically, we examine the empirical determinants of job mobility and of the dynamics of compensation of executives in order to assess the magnitude of their returns to firm tenure and the importance of mobility for compensation growth. This includes managers’ personal characteristics such as education, age, general experience, and firm-specific experience (positions and tenure).

Second, we plan to take into account the endogeneity of mobility decisions on the part of executives, the cumulative effect of mobility on executive compensation, and the selection of executives to top positions within a firm.

Third, we plan to treat the allocation of firm value among executives and its shareholders as a standard joint consumption problem, by proving that a measure of the implied value sharing rule, as embedded in the observed total compensation of an executive, can be recovered. We then explore the extent to which variation in this sharing rule over time for the same firm and across firms is responsible for the observed time profile of executive compensation and for differences in executive pay across firms of different market capitalizations. We compare our results to those obtained by employing standard tools of applied analysis as in Topel (1991). Our preliminary results show that common estimates of the importance of individual and firm characteristics for executive compensation that do not take explicitly into account job mobility and heterogeneity are severely biased.

Douglas DeJong is professor and departmental Executive Officer/ Arthur Andersen Alumni/Faculty Professor at The University of Iowa. He holds a PhD Degree in Accounting from the University of Michigan.

Paolo Perego

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