ABSTRACT

To answer the question whether managers are paid for market power, we propose a theory of executive compensation in an economy where firms have market power, and the market for managers is competitive. We identify two distinct channels that contribute to manager pay: market power and firm size. Both increase the profitability of the firm, which makes managers more valuable as it increases their marginal product. Using data on executive compensation from Compustat between 1994 and 2019, we quantitatively analyze how market power affects Manager Pay and how it changes over time. We attribute on average 44.5% of Manager Pay to market power, the remainder is due to firm size. Over time, 58.4% of the growth in pay is due to market power. We also find there is a lot of heterogeneity within the distribution of managers. For the top managers, 76.6% of their pay in 2019 is due to market power, and so is nearly all of the growth since 1994. For the lower-ranked managers, pay is determined mainly by firm size. Top managers are hired disproportionately by firms with market power, and they get rewarded for it, increasingly so.

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If you have any questions regarding the seminar, please contact the seminar organizers Kjell Gunnar Salvanes or Tone Solheim.