Pre-CEO Executive Skill Accumulation and Firm-CEO Matching with Pay Limits

Seungjin Han

Department of Economics Working Papers from McMaster University

Abstract: CEO jobs have increasingly emphasized general executive rather than firm-specific skill. Executives therefore have high stakes riding on executive skill accumulated in their non-CEO executive positions in order to establish themselves as talented before being on the competitive CEO market. This paper shows the far-reaching impact of CEO pay limits in an assignment model augmented by costly pre-CEO executive skill accumulation on the job. If the CEO pay limit is so severe that the minimum pay cut required for the highest-paid CEO is more than the lowest-paid CEO's expected pay net of her cost of working as a CEO, then it induces an equilibrium CEO pay function discontinuous at the top. This distorts high ability executives' equilibrium skill accumulation and results in a discontinuous bunching even prior to being on the CEO market. It may redistribute earnings from CEOs to shareholders only at the low-end of firm-CEO matches, given the distorted executive skill distribution.

Keywords: Pre-CEO Executive Skill Accumulation; CEO Pay Limits; Firm-CEO matching (search for similar items in EconPapers)
JEL-codes: G32 M12 M52 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2016-03
New Economics Papers: this item is included in nep-hrm
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Persistent link: https://EconPapers.repec.org/RePEc:mcm:deptwp:2016-04

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