Econometrics Essay

INDUSTRIES AND THEIR IMPACT ON CEO SALARIES.

INTRODUCTION.

CEO salaries have been a hot topic of conversation over the years and ever more so now with the recession we are in. Everybody now wants to know more about the payouts that these heads of companies are receiving in light of recent happenings. The purpose of this paper is to analyze the salaries of chief executive officers and to find out what factors play a significant role in determining these salaries. In their 1997 article on Firm diversification and CEO compensation: Managerial Ability or Executive entrenchment, Nancy Rose and Andrea Shepard postulated that firm diversification was one of the factors that affected CEO salaries. They wrote, “Investigating the relationship between CEO compensation and firm diversification over 1985-1990, we find that the CEO of a firm with two lines of business averages 13% more in salary and bonus than the CEO of a similar-sized but undiversified firm, ceteris paribus. We explore two potential explanations for this: the match of higher-ability CEOs with firms that are more difficult to manage, and the association of diversification with CEO entrenchment. The data are more consistent with ability matching: the premium is invariant to CEO tenure, and incumbents who diversify their firms earn less than newly hired CEOs at already-diversified firms.” (Rose & Shepard 1997). This is what they were able to discover about the impact of firm diversification on CEO compensation.

In my research, I tried to find out if the type of industry under which the company is classified also affects the amount of money the CEO makes. I paid particular attention to the industrial companies, transport and utilities companies, finance companies and consumer product companies which are the major industries.

CONCEPTUAL FRMEWORK.

I thought about the problem and how to go about with the econometric analysis and because obviously diversification and particular industries are not the only...