Selection Versus Incentives in Incentive Pay: Evidence from a Matching Model

Higher incentive pay is associated with better firm performance. I introduce a model of CEO-firm matching to disentangle the two confounding effects that drive this result. On one hand, higher incentive pay directly induces more effort; on the other hand, higher incentive pay indirectly attracts more talented CEOs. I find both effects are essential to explain the result, with the selection effect accounting for 12.7% of the total effect. The relative importance of the selection effect is the largest in industries with high talent mobility and in more recent years.

04. June 2018

Authors Shuo Xia

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Professor Shuo Xia, PhD
Professor Shuo Xia, PhD
Economist

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