Abstract
Customer concentration affects CEO compensation through two possible channels: first, a more concentrated customer base raises firm risk, for which CEO requires higher compensation; second, CEO is likely to hold customer ties, and a more concentrated customer base enables CEO to have more bargaining power and subsequently a higher compensation. Both channels point to a positive relationship between customer concentration and CEO compensation. Through a large sample of US firms in the 1992-2009 period, we find strong evidence supporting this relationship. Specifically, the presence of a major corporate customer is associated with 4.2% higher CEO compensation, with cash pay being 3.6% higher and equity pay being 10.5% higher. This represents an additional annual compensation of around 150,000 dollars for the average corporate CEO working for a firm with a major customer. Our findings are robust even if we account for endogeneity by employing propensity score matching and instrumental variable analysis.
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