Was Adam Smith Right? Evidence of Compensating Differential in CEO Pay

Swarnodeep HomRoy

Manchester School, 2016, vol. 84, issue 1, 1-24

Abstract: This paper estimates the compensating differential in CEO pay for the increasing risk of dismissal using contracted severance pay eligibility of the CEO as the main instrument. US CEOs receive a 3 per cent premium in pay for each percentage point increase in the risk of dismissal. In pointing to the dismissal risk as a determinant of CEO pay, these findings contribute to the debate on the recent growth in CEO pay and the potential impacts of governance reforms.

Date: 2016
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