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The evolution of pay premiums for managerial attributes

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  • Li, Si
  • Perez, M. Fabricio

Abstract

This paper proposes and estimates an interactive fixed effects model of executive compensation, which allows for time-variant pay premiums for unobserved manager attributes. We find that two managerial traits can explain executive compensation over time: talent and conservatism. The market premium for talent is higher in bull markets, as the higher marginal productivity of human capital during these periods increases the demand and thus the price for talents. Such pay premium is concentrated among top talented managers, who earn a premium about five times that of median talented managers. The pay premium for conservatism is linked to the equity market risk premium, with conservatism being discounted (compensated) during the low (high) risk premium periods. We show that risk-taking managers are rewarded during the early period of our sample. However, after the periods characterized by higher risk premium, such as the financial crisis, conservatism becomes a more desirable trait.

Suggested Citation

  • Li, Si & Perez, M. Fabricio, 2021. "The evolution of pay premiums for managerial attributes," Journal of Corporate Finance, Elsevier, vol. 69(C).
    • Handle: RePEc:eee:corfin:v:69:y:2021:i:c:s0929119921001012
    DOI: 10.1016/j.jcorpfin.2021.101980
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    More about this item

    Keywords

    Executive compensation; CEO pay; Managerial ability; Human capital; Fixed effects; Manager fixed effects; Interactive fixed effects; Factor models;
    All these keywords.

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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