What Death Can Tell: Are Executives Paid for Their Contributions to Firm Value?

Using stock price reactions to sudden deaths of top executives as a measure of expected contribution to shareholder value, we examine the relationship between executive pay and managerial contribution to shareholder value. We find, first, that the managerial labor market is characterized by positive sorting: managers with high perceived contributions to shareholder value obtain higher pay. The executive pay-contribution relationship is stronger for professional executives and for executives with high compensation. We estimate, second, that an average top executive (chief executive officer) appears to retain 71% (65%) of the marginal rent from the firm-manager relationship. We examine, third, how the executive pay-contribution relationship varies with individual, firm, and industry characteristics. Overall, our results are informative for the ongoing discussion about the level of executive compensation. This paper was accepted by Wei Jiang, finance.