Research Discussion Papers, Bank of Finland
No 17/2012:
Urban agglomeration and CEO compensation
Bill Francis ()
, Iftekhar Hasan ()
, Kose John ()
and Maya Waisman ()
Abstract: An underlying assumption in the executive compensation
literature is that there is a national labor market for CEOs. The urban
economics literature, however, documents higher ability among workers in
large metropolitans, which results in a real and stable urban wage premium.
In this paper, we investigate the link between the spatial clustering of
firms in big, central cities (i.e., urban agglomeration) and the level and
structure of CEO compensation. Using CEO compensation data for the period
1992–2004, we document a positive relation between the size and centrality
of the city in which the firm is headquartered and the total, as well as
the equity based portion of CEO pay. Our results are robust to a host of
control variables, sensitivity and endogeneity tests, indicating that urban
agglomeration may reflect positive externalities, such as knowledge
spillovers, business connections and improved access to private information
that have a positive effect on CEO pay and incentive driven compensation
for good performance. We document gradual human capital gains acquired from
big city work experience that are transferable to the rural area, and
rewarded for, once the CEO relocates into a smaller, less central
community. Our tests provide novel evidence of information spillovers and
networking opportunities in big cities that can directly affect how CEOs
are compensated. Such sources of information and influence represent
something for which firms are willing to pay higher and more incentive
driven pay, evidence in favor of a market-based explanation for CEO
compensation.
Keywords: agglomeration; CEO; compensation; incentive; geography; (follow links to similar papers)
JEL-Codes: D83; G30; J31; R12; (follow links to similar papers)
64 pages, April 19, 2012
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