Firm-CEO Matching with Pre-CEO Executive Skill Accumulation

Executives have high stakes riding on executive skill accumulated in their non-CEO executive positions in order to establish themselves as talented before being on the competitive CEO market. This paper considers an assignment model augmented by costly pre-CEO executive skill accumulation on the job. As the firm size distribution is more spread to the right, causing the increase in firm size, the proportion of CEO pay attributed to the informational effect (the direct productivity effect) of executive skill accumulation uniformly decreases (increases). Subsequently, the equilibrium converges to the competitive equilibrium with complete information, improving efficiency at the cost of worsening income equality. In addition, the paper shows the far-reaching impact of pay limits to control CEO pay. If the CEO pay limit is so severe that the minimum pay cut required for the highest-paid CEO is more than the lowest-paid CEO’s expected pay net of her cost of working as a CEO, then it induces an equilibrium CEO pay function discontinuous at the top. This distorts high ability executives’ equilibrium skill accumulation and results in a discontinuous bunching even prior to being on the CEO market. It may redistribute earnings from CEOs to shareholders only at the low-end of firm-CEO matches, given the distorted executive skill distribution. (JEL G32, M12, M52) ∗Address: Department of Economics, McMaster University 280 Main Street West, Hamilton, Ontario L8S 4M4, Canada. Phone: +1-905-525-9140 x23818. E-mail: [email protected]. Acknowledgement to be added. All errors are mine alone.