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

Nancy Rose, Andrea Shepard
1994 unpublished
FIRM DIVERSIFICATION AND CEO COMPENSATION: MANAGERIAL ABILITY OR EXECUTIVE ENTRENCHMENfl ABSTRACF 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 morn in total compensation than the CEO of a similar-sized but undiversifled firm, all else equal. This corresponds to average 1990 salary gains of
more » ... ry 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 MIT Sloan School Stanford GSB
doi:10.3386/w4723 fatcat:acppym5ezrafjiou5lxe6ahonm