CEO Incentives and Firm Size

  title={CEO Incentives and Firm Size},
  author={George P. Baker and Brian J. Hall},
  journal={Journal of Labor Economics},
  pages={767 - 798}
  • G. BakerB. Hall
  • Published 1 November 1998
  • Business
  • Journal of Labor Economics
We develop a model that clarifies how to measure CEO incentive strength and how to reconcile the enormous differences in pay sensitivities between executives in large and small firms. The crucial parameter is shown to be the elasticity of CEO productivity with respect to firm size. We find that CEO marginal products rise significantly with firm size (confirming Rosen’s conjecture that CEOs of large firms have a “chain letter” effect on firm performance), and overall CEO incentives are roughly… 

How Much Do CEO Incentives Matter?

The impact of CEO incentive compensation on firm performance is difficult to quantify because performance also affects incentives. To circumvent this problem, I form an estimate of the changes in CEO

The Impact of Firm Size on Dynamic Incentives and Investment

Recent studies conclude that small firms have higher but more variable growth rates than large firms. To explore how this empirical regularity affects moral hazard and investment, we develop an

Why Has CEO Pay Increased so Much?

This paper develops a simple equilibrium model of CEO pay. CEOs have different talents and are matched to firms in a competitive assignment model. In market equilibrium, a CEO’s pay changes one for

Agency Costs and Firm Productivity

We explore how the separation between ownership and control affects firm productivity. Using Finnish administrative data on the universe of limited liability firms, we document a substantial increase

CEO Talent, CEO Compensation, and Product Market Competition

Difference that CEOs Make: An Assignment Model Approach

This paper presents an assignment model of CEOs and firms. The distributions of CEO pay levels and firms' market values are analyzed as the competitive equilibrium of a matching market where talents,

The impact of risk and monitoring on CEO equity incentives

This paper uses a novel empirical setting to explore the association between a firm’s operational risk, managerial monitoring costs, and the level of CEO equity incentives. We investigate a sample of

Evidence that Executive Productivity Matters When Determining Optimal Incentive Levels

We document evidence that (absolute) grant size and exercise price choices in determining optimal pay-performance sensitivity are moderated by executive productivity. Specifically, we find that

Capital Structure Inertia and CEO Compensation

There is strong empirical evidence that firms do not always adjust their capital structure according to established capital structure theories. Rather, they follow a passive strategy such that

Are CEOS Really Paid Like Bureaucrats?

A common view of CEO compensation is that there is essentially no correlation between firm performance and CEO pay. This calls into question an important component of effective corporate governance.

The Dependence of payPerformance Sensitivity on the Size of the Firm

I analyze the relationship between firm size and the extent to which executive compensation depends on the wealth of the firm's shareholders. I use a simple agency model to motivate an econometric

Performance Pay and Top Management Incentives

Our estimates of the pay-performance relation (including pay, options, stockholdings, and dismissal) for chief executive officers indicate that CEO wealth changes $3.25 for every $1,000 change in

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

The Use of Equity Grants to Manage Optimal Equity Incentive Levels

We predict and find that firms use annual grants of options and restricted stock to CEOs to manage the optimal level of equity incentives. We model optimal equity incentive levels for CEOs, and use

The Impact of Regulation on CEO Labor Markets

I examine empirically whether the executive labor market helps to slot managers with higher education quality into jobs where they can obtain greater returns from their human capital skills.

Executive Compensation and Principal-Agent Theory

  • John Garen
  • Economics
    Journal of Political Economy
  • 1994
The empirical literature on executive compensation generally fails to specify a model of executive pay on which to base and test hypotheses regarding its determinants. In contrast, this paper

CEO Pay and Firm Performance: Dynamics, Asymmetries, and Alternative Performance Measures

This study explores the dynamic structure of the pay-for- performance relationship in CEO compensation and quantifies the effect of introducing a more complex model of firm financial performance on

Contracts and the Market for Executives

The paper reviews empirical findings on executive compensation in light of marginal productivity and contract theories. The executive labor market performs three functions. First, control must be