Globalization and CEO Pay : Estimating the Value of Good Leaders in Complex Firms

Much attention has been given to increasing income shares of top income earners in many advanced economies, particularly in the U.S. This increase is partly driven by so-called ‘supermanagers’, the chief executive officers (CEOs) of the largest firms. In this paper, we identify CEOs from matched worker-firm data for Denmark for the period 1995-2008 and construct firm complexity measures related to globalization. We document novel stylized facts about globalization and CEO compensation. We investigate whether the rise in CEO compensation can be explained by increasing firmlevel globalization and find that changes in the export volume correlates with changes in CEO compensation, while firm complexity measures play a minor role. This pattern persists when conditioning on firm size. Firm exports are then instrumented with world import demand in order to identify the causal impact of exports on CEO earnings. Our results indicate that if the median firm doubles its exports for exogenous reasons, then the relative earnings of its CEO increases by 18% from 3.5 to 4.1 times the income of the average worker in the firm. Finally, we find suggestive evidence in favor of the hypothesis that externally hired CEOs are less likely to be rewarded for exogenous changes in exports than internally hired CEOs.