Urban Agglomeration and CEO Compensation

68 Pages Posted: 2 Mar 2017

See all articles by Kose John

Kose John

New York University (NYU) - Department of Finance

Maya Waisman

Fordham University - Gabelli School of Business

Date Written: April 19, 2012

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. Key words: Agglomeration, CEO, Compensation, Incentive, Geography. JEL Code: D8, G3, J3, R1

Suggested Citation

John, Kose and Waisman, Maya, Urban Agglomeration and CEO Compensation (April 19, 2012). Bank of Finland Research Discussion Paper No. 17/2012, Gabelli School of Business, Fordham University Research Paper No. 2925155, Available at SSRN: https://ssrn.com/abstract=2925155 or http://dx.doi.org/10.2139/ssrn.2925155

Kose John

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0337 (Phone)
212-995-4233 (Fax)

Maya Waisman

Fordham University - Gabelli School of Business ( email )

113 West 60th Street
Bronx, NY 10458
United States

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