Are Managers Paid for Market Power?
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 Com- pustat, 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.
De Loecker acknowledges support from the ERC, Consolidator grant 816638, and Eeckhout from the ERC, Advanced grant 882499, from AEI (Severo Ochoa, Barcelona School of Economics CEX2019-000915-S), and from PGC2018-096370-B-I00. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.