Executive labor market

Gabarro, Marc (2011) Executive labor market. Doctoral thesis, University of London: London Business School.

Abstract

This thesis focuses on corporate governance and the executive labor market. Through my research, I unveil new mechanisms that in uence the relationship between shareholders, stakeholders and top executives; highlighting new determinants of the matching between top executives and firms. Chapter 2 studies the impact of firm specific skills on the mobility and compensation of top executives. With the help of a simple model, I develop a set of empirical predictions on the cross-industry differences in the probability of internal promotions and the executive compensation. These predictions are then tested using the tenure of non-managerial workers as a proxy for the importance of firm specific skills. As predicted by my model, an increase in the importance of firm specific skills both raises the probability of internal promotion and decreases their total compensation. Moreover, the compensation differential between externally appointed and internally promoted managers increases with the importance of firm specific skills. Chapter 3 explores the role of corporate governance as part of an optimal compensation scheme. When firms have to compete to attract better managers, firms' incentives to invest in disciplinary mechanisms such as corporate governance are reduced because managerial rents are determined by the manager's reservation value when employed elsewhere. As a result, in equilibrium, better managers work for firms with weaker governance. Consistent with these implications, we show empirically that a firm's executive compensation is not chosen in isolation but also depends on other firms' governance and that better managers are matched to firms with weaker corporate governance. Finally, Chapter 4 documents the importance of CEO incentives in the decision to undertake a stock split. CEOs with convex compensation contracts seem to use the increase in stock volatility associated with a stock split for personal benefit.