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Jan Eeckhout - Universitat Pompeu Fabra
Monday 16 October 2023, 02:30am - 04:00pm

Are Managers Paid for Market Power?

Abstract:

The rapid increase in executive compensation since the late 1980s can be attributed to the rise of firm size in the upper tail of the firm size distribution. But in that period, market power also increases sharply. Firm size and market power are determined simultaneously and both affect profitability, and hence manager pay. We propose a theory of executive compensation that incorporates oligopolistic competition in the product market. This theory allows us to decompose and quantify the contribution to manager pay of firm size and of market power. We find that market power contributes an average of 45.8%, which has been rising from 38.0% in 1994 to 48.8% in 2019. Most strikingly, there is significant heterogeneity across managers: in 2019, 80.3% of top manager pay was due to market power. We conclude that top managers are hired disproportionately by firms with market power, and they get rewarded for it, increasingly so.

   
   
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