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

By N. Rose, Andrea Shepard. 2018

315 citations recorded by the source corpus.

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.

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Citations in the corpus

The cost of pride: Why do firms from developing countries bid higher? (2011, unknown): “1986; Shleifer and Vishny 1989; Stulz 1990; Jensen and Murphy 1990; Rose and Shepard 1997;”
CEO Compensation and Bank Mergers (2001, background): “Rose and Shepard (1997) show that there is a diversification premium in CEO compensation, although they attribute this more to needing to attract better managers for more diversified (and hence, more complicated to manage) firms.”
The Effect of Board Capital and CEO Power on Corporate Social Responsibility Disclosures (2016, background): “…position for a long period, agency problems could begin to arise, as long tenure has been shown to increase managerial power (Morck et al. 1988; Berger et al. 1997; Rose and Shepard 1997; Her-malin and Weisbach 1998; Chidambaran and Prabhala 2003; Ryan and Wiggins 2004) through entrenchment.”
Why Focus? A Study of Intra-Industry Focus Effects (2003, unknown): “Rose and Shepard [1997] use the same measure in studying the relationship between firm diversification and CEO compensation.”
The Agency Problem, Corporate Governance, and the Asymmetrical Behavior of Selling, General, and Administrative Costs (2012, unknown): “Managers are motivated to empire build because they expect to obtain greater prestige and higher compensation if they increase firm size (Murphy 1985; Jensen and Murphy 1990; Rose and Shepard 1997).”