Working Paper: CEPR ID: DP17182
Authors: Jan Eeckhout; Jan De Loecker; Renjie Bao
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 man- agers is competitive. We identify two distinct channels that contribute to manager pay in the model: 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, we quantitatively analyze how market power affects Manager Pay and how it changes over time. We attribute on average 45.8% of Manager Pay to market power, from 38.0% in 1994 to 48.8% in 2019. Over this period, market power accounts for 57.8% of growth. We also find there is a lot of heterogeneity within the distribution of managers. For the top managers, 80.3% of their pay in 2019 is due to market power. Top managers are hired disproportionately by firms with market power, and they get rewarded for it, increasingly so.
Keywords: market power; manager pay; executive compensation; markups; reallocation; superstars
JEL Codes: L11; J31; D24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Market power (L11) | Profitability (L21) |
| Firm size (L25) | Profitability (L21) |
| Profitability (L21) | Marginal product of managers (D24) |
| Marginal product of managers (D24) | Manager pay (M12) |
| Market power (L11) | Manager pay (M12) |
| Firm size (L25) | Manager pay (M12) |
| Market power (L11) | Growth in manager pay (M12) |
| Top managers (M12) | Manager pay (M12) |