2002, ‘Can Managerial Superiority Explain High Executive Pay in Large Firms? Evidence Supportive of Rosen’s ‘cloning

Version dated 19/08/2002 We present the first empirical evidence in support of Rosen’s (1982) ‘cloning’ hypothesis, explaining the firm size-executive pay effect in terms of a predicted greater superiority in managerial talent the larger is the firm. We show that executives from better performing firms are more likely to join larger firms. Moreover, a misspecification arises if actual firm size is used in pay-performance sensitivity estimation. Correcting for specification bias results in a significantly smaller size effect on pay. Remarkably, the prior performance of the firm that previously employed the executive is a more significant determinant of the executive’s pay with the current employer than is current firm performance. Key words: executive pay, firm size, managerial ability, firm performance, cloning hypothesi