Firm Diversification and CEO Compensation: Managerial Ability or Executive Entrenchment?

Nancy Rose and Andrea Shepard

RAND Journal of Economics, 1997, vol. 28, issue 3, 489-514

Abstract: Investigating the relationship between CEO compensation and firm diversification over 1985-1990, we find that the CEO of a firm with two lines of business averages 13% more in salary and bonus than the CEO of a similar-sized but undiversified firm, ceteris paribus. We explore two potential explanations for this: the match of higher-ability CEOs with firms that are more difficult to manage, and the association of diversification with CEO entrenchment. The data are more consistent with ability matching: the premium is invariant to CEO tenure, and incumbents who diversify their firms earn less than newly hired CEOs at already-diversified firms.

Date: 1997
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Working Paper: Firm Diversification and CEO Compensation: Managerial Ability or Executive Entrenchment? (1994)
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