Claudia Custodio

Generalists versus Specialists: Lifetime Work Experience and CEO Pay

We show that pay is higher for CEOs with general managerial skills gathered during lifetime work experience. We use CEOs’ resumes of S&P 1,500 firms from 1993 through 2007 to construct an index of general skills that are transferable across firms and industries. We estimate an annual pay premium for generalist CEOs — those with an index value above the median — of 19% relative to specialist CEOs, which represents nearly a million dollars per year. This relation is robust to the inclusion of firm- and CEO-level controls, including fixed effects. CEO pay increases the most when firms externally hire a new CEO and switch from a specialist to a generalist CEO. Furthermore, the pay premium is higher when CEOs are hired to perform complex tasks such as restructurings and acquisitions. Our findings provide direct evidence of the increased importance of general managerial skills over firm-specific human capital in the market for CEOs in the last decades.

Do General Managerial Skills Spur Innovation

We show that firms with chief executive officers (CEOs) who gain general managerial skills over their lifetime work experience produce more patents. We address the potential endogenous CEO-firm matching bias using firm-CEO fixed-effects and variation in the enforceability of non-compete agreements across states and over time during the CEO’s career. Our findings suggest that generalist CEOs spur innovation because they acquire knowledge beyond the firm’s current technological domain, and have skills that can be applied elsewhere should innovation projects fail. We conclude that an efficient labor market for executives can promote innovation by providing a mechanism of tolerance for failure.

When Pay for Luck is Pay for Action: CEO Compensation and Real Estate Prices

We use changes in real estate prices to study the sensitivity of CEO compensation to luck and to responses to luck. Pay for luck can be optimal when CEOs are expected to react to luck. To identify responses to luck we rely on the fact that accounting performance, unlike market performance, only reflects changes to real estate prices if the CEO responds to the real estate shocks. We show that CEO compensation is linked to responses to real estate luck, which can partially explain pay for luck.

The Value of CEOs’ Industry Expertise - Evidence from Mergers & Acquisitions

We quantify the value of CEO industry-specific experience in the context of diversifying mergers and acquisitions. We find that CEOs who have work experience in the industry of the target add value for their shareholders. The abnormal return to the bidders’ shareholders is between 1.1% and 1.3% higher when the CEO has top management experience in the target industry. Analyzing potential mechanisms, we provide evidence that CEOs with industry experience in the target’s industry are not better in creating higher synergies but in negotiating more favorable terms. We show that experience is particularly valuable in environments of high informational asymmetries (1.6% - 2.9%). The results also suggest that certain skills or experience of CEOs are neither completely general nor firm-specific but rather specific to an industry.