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

Stanimir Morfov and Manuel Santos
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Stanimir Morfov: University of Miami

No 2017-03, Working Papers from University of Miami, Department of Economics

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.

Keywords: Managerial talent; adverse selection; optimal contract; firm’s size; volatility of company returns; CEO age; relative performance evaluation Publication Status: Ex. Under Review (search for similar items in EconPapers)
JEL-codes: D82 G30 J33 (search for similar items in EconPapers)
Date: 2017-03-28
New Economics Papers: this item is included in nep-bec, nep-cfn, nep-hrm and nep-lma
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