NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Firm Diversification and CEO Compensation: Managerial Ability or Executive Entrenchment?

Nancy L. Rose, Andrea Shepard

NBER Working Paper No. 4723
Issued in April 1994
NBER Program(s):   IO

Data for a sample of 558 CEOs over 1985-1990 suggest substantial compensation premia for managers of diversified firms. The CEO of a firm with two distinct lines of business averages 10 to 12 percent more in salary and bonus and 13 to 17 percent more in total compensation than the CEO of a similar-sized but undiversified firm, all else equal. This corresponds to average 1990 salary gains of $115,000 to $145,000 per year for our sample. Diversification may raise pay because the CEO's job requires higher ability or because it is associated with CEO entrenchment. If ability explains the correlation, we would expect the diversification premium to be invariant to tenure. Entrenchment models suggest higher premia for more experienced (more entrenched) CEOs, and an increase in compensation when the CEO diversifies the firm. The data support an ability model over an entrenchment explanation. The diversification premium is unaffected by tenure, and increasing diversification reduces compensation for incumbent CEOs, all else equal.

download in pdf format
   (383 K)

email paper

This paper is available as PDF (383 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w4723

Published: Rand Journal of Economics, Vol. 28, no. 3 (Autumn 1997): 489-514.

Users who downloaded this paper also downloaded these:
Bebchuk and fried w9813 Executive Compensation as an Agency Problem
Frydman and Jenter w16585 CEO Compensation
Baker and Hall w6868 CEO Incentives and Firm Size
Abowd and Kaplan w7124 Executive Compensation: Six Questions that Need Answering
Gibbons and Murphy w3792 Optimal Incentive Contracts in the Presence of Career Concerns: Theory and Evidence
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us