Promotion, turnover and compensation in the executive labor market

Abstract

This paper develops an equilibrium model of the executive labor market, analyzes identification issues, and estimates it with a matched panel of firms and executives to quantify the roles of moral hazard, human capital, career concerns, and bargaining between executives and employers. We find that the investment value of acquiring more human capital reduces compensation in all ranks. This effect increases with job turnover, but declines with age and experience. We show that career concerns ameliorate conflicting shareholder and executive goals, and we explain why it is most effective at the middle ranks. Expected compensation increases with firm size; similarly, executives with more human capital are assigned to higher ranks and are paid more. Yet, these differences are mostly attributable to the risk premium, which also increases with firm size and rank. Our study pays special attention to well-networked executives, who we find receive more nonpecuniary benefits but have a lower certainty-equivalent wage; to women, who are distinguished mainly by their higher exit rate; and to educational background. We estimate MBAs have more career incentives and occupationally specific human capital than PhD graduates, but the latter group has a higher marginal product and better outside options.

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