Executive Compensation and Managerial Ability: Large-Sample Evidence

Abstract

We examine a measure of managerial ability, based on managers’ efficiency in generating revenues, to explain variations in executive compensation. Although we find managerial ability to be positively associated with compensation after controlling for standard determinants of pay, our measure of managerial ability explains a negligible amount of the variation in executive compensation. We find that the traditional determinants of executive compensation, such as firm and executive level characteristics, remain the dominant contributors to executive compensation.