Using Global Shocks to Understand the Level and Structure of Executive Compensation

David Hummels, Jakob Munch and Huilin Zhang

No 35004, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We build a model of CEO compensation that unites principal-agent and assignment models in the face of trade shocks that interact with CEO effort. The model predicts that trade shocks change CEO compensation through scale, volatility, and ability-magnification channels. Using Danish matched worker-firm data, we find empirical support for these channels: (1) Exogenous shocks to trade increase the size and value of the firm and CEO compensation; (2) the share of firm value paid to the CEO is increasing in the size and value of the firm and increasing in the volatility induced by global shocks; (3) Higher-ability CEOs generate increases in firm value that are more than 100 times greater than their compensation, through a combination of mitigating losses and maximizing the return to positive shocks.

JEL-codes: F16 G30 J30 J31 M52 (search for similar items in EconPapers)
Date: 2026-03
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