Abstract
We present and estimate a dynamic model in which a board of directors and a CEO interact to set CEO compensation, equity ownership, and effort levels. CEOs in the model have four attributes: risk aversion, effort aversion, a reservation value and influence over the board. The intent is to evaluate the importance of these CEO attributes on compensation, incentives and firm value. We find that variation in CEO attributes explains the majority of variation in compensation, but little of the variation in firm value. All of the attributes have significant effects on compensation in isolation, but, because of correlations among the attributes, the main drivers of cross-sectional compensation are risk aversion and influence on the board. We estimate the impact of CEOs having influence over their own pay, finding that removing the influence increases shareholder value in the typical firm by 1.7%.
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