How much are differences in managerial ability worth?

The Match between CEO and Firm*

“…In our sensitivity analysis, however, good matches (bad match-dismissal) are positively (negatively) related to sales. The significance of sales is consistent with previous research, which suggests that matching is less important at larger firms (Bishop 1990) and that CEOs tend to be of higher ability at larger firms (Hayes and Schaefer 1999). When reestimating table 3, we find that the outside and dismissal dummy variables remain insignificant.…”

“…According to Murphy, the executive employment contract often includes a guaranteed minimum increase in base salary over the subsequent 5-year period. Not surprisingly, we rarely observe pay cuts in the CEO labor market, suggesting that CEO compensation is downwardly rigid (Hayes and Schaefer 1999). The presence of downwardly rigid wages 3.…”

“…Bishop (1990) finds that matching between firms and workers (not CEOs) is less important at larger firms. Hayes and Schaefer (1999) find evidence that larger firms hire CEOs of higher ability. Mean sales for the data are consistent with the interpretation that, if CEOs at larger firms are more able and matching is less important, early dismissal is less likely at larger firms.…”

“…First, turnover in job match models occurs because the worker receives an alternative wage offer that exceeds the wage offer of the incumbent firm. This is not descriptive of the CEO labor market, given the small number of firm-to-firm CEO changes observed (Gibbons and Murphy 1992;Hayes and Schaefer 1999). Exiting CEOs almost always exit the CEO labor market, although they may remain on the BODs.…”

Management Economics in a Large Retail Company

“…Terviö (2008), using CEO pay as a proxy for their ability, calculates that, if we were to replace the CEOs of the 1,000 largest U.S. businesses with the lowest paid and presumably least able, their total capital value would fall by 0.13%-0.16% in 2004, or by 4.3%-5.3% in the long run, applying a 3% future discount rate (approximately the average of the Federal Reserve System's discount rate for 2004). Hayes and Schaefer (1999) find that share prices fall by 3%-5% when a (presumably more able) CEO quits for a better job, an effect of similar magnitude to Terviö's (2008). However, the applicability of the approach using share price movements is limited to large publicly quoted firms.…”