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Promotion, Turover and Compensation in the Executive Market

  • Economics
  • Education
  • Law


Promotion, Turnover and Compensation in the Executive Market� George-Levi Gayle, Limor Golan, Robert A. Miller Tepper School of Business, Carnegie Mellon University July 2008 Abstract This paper is an empirical study of the market for managers, more speci cally the e¤ects of agency, human capital, and preferences on their promotion, tenure, turnover and compensation. From a large longitudinal data set compiled from observations on executives and their publicly listed rms, we construct a career hierarchy and report on its main features. Our summary results motivate a dynamic competitive equilibrium model, whose parameters we identify and estimate. Controlling for heterogeneity amongst rms, which di¤er by size and sector, and also managers, whose backgrounds vary by age, gender and education, our estimates are used to evaluate how important moral hazard and job experience are in jointly determining promotion rates, turnover and compensation. 1 Introduction Chief executives are paid more than their subordinates, and internal promotions with the rm are positively correlated with wage growth.1 Since high ranking executives are almost always drawn from the lower ranks, usually from within the rm, it is tempting to con- clude that part of the reward from working hard in a low rank is the chance of promotion to earn rents. Theory provides several possible explanations, ranging from human capital acquired on lower level job, to superior ability being revealed with experience leading to wage dispersion, or as the prize in a tournament played by lower ranked executives to induce hard work.2 The premise of all these explanations is the commonly held opinion that the CEO is better o¤ than those he supervises. Yet several studies, conducted with data on executive compensation and returns from publicly traded rms, show quite con- clusively that CEO compensation is more sensitive to the excess returns of rms than the compensation of lower ranked executives.3 Thus at the upper levels of the career l

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