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The evolution of pay premiums for managerial attributes

Si Li and M. Fabricio Perez ()

Journal of Corporate Finance, 2021, vol. 69, issue C

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.

Keywords: Executive compensation; CEO pay; Managerial ability; Human capital; Fixed effects; Manager fixed effects; Interactive fixed effects; Factor models (search for similar items in EconPapers)
JEL-codes: C23 G3 G32 J24 J31 J33 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1016/j.jcorpfin.2021.101980

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