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A Model of Managerial Talent: Addressing Some Puzzles in CEO Compensation

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  • Stanimir Morfov

    (University of Miami)

  • Manuel Santos

    (University of Miami)

Abstract

In this paper we present an adverse selection model of managerial talent. The model can account for some empirical regularities in executive compensation such as the higher level of CEO pay and the prominence of incentive pay in large and high-volatility firms as well as the controversial evidence on career concerns. Relative performance evaluation (RPE) is only obtained if the performance function is weakly separable on managerial talent and internal productivity factors. These predictions stand in sharp contrast to those of competing theories based upon moral hazard, managerial talent, and rent extraction.

Suggested Citation

  • Stanimir Morfov & Manuel Santos, 2017. "A Model of Managerial Talent: Addressing Some Puzzles in CEO Compensation," Working Papers 2017-03, University of Miami, Department of Economics.
    • Handle: RePEc:mia:wpaper:2017-03
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    File URL: https://www.herbert.miami.edu/_assets/files/repec/WP2017-03.pdf
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    More about this item

    Keywords

    Managerial talent; adverse selection; optimal contract; firm’s size; volatility of company returns; CEO age; relative performance evaluation Publication Status: Ex. Under Review;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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