The Battle for Talent: Globalisation and the Rise of Executive Pay

Recent long-run time series evidence for the US suggests that popular explanations for the surge in executive pay are not supported by the data. This paper explores the role of globalization for the rise in executive pay based on new firm survey data on executives and their pay in Austria and Germany. I find that firms more exposed to international competition engage in talent fairs to search and attract skilled workers. Furthermore, I find that seniority related pay varies for di erent levels of foreign competition suggesting that firms increase CEO pay when faced with the threat of losing their senior executives to foreign competitors, while seniority in o ce itself does not lead to higher pay. These findings support the idea of a ’war for talent’ that is triggered by international trade, as suggested by recent theories of international trade and organisations. 1. Non Technical Summary Recent long-run time series evidence for the US suggests that popular explanations for the surge in executive pay are not supported by the data. The managerrent seeking hypothesis put forward by Bebschuk and Fried 2004 appears to be implausible because both the level of pay and the use of options were lower in the 1950s to the 1970s than in more recent years even though corporate governance was weaker in the earlier period. Furthermore, the explanation put forward by Gabaix and Landier (2008) that the rise in executive pay is due to increases in firm size appears to be only weakly supported by evidence for the period prior to the mid-1970s. This paper explores the role of globalisation in the rise in executive pay based on new firm survey data on executives and their pay in Austria and Germany. A proper understanding of the rise in executive pay entails integrating the theory of the firm with international trade theory. We look at rising executive pay from the perspective of two important changes that have happened in the last two decades: the changing nature of the corporation on the one hand and the stronger integration of rich economies into the world economy on the other. Rising CEO pay is an expression of both: a new way firms empower their managers as well as an increase in the importance of international trade in rich countries. We argue that an increase in trade exposure in rich countries in the last two decades has led to a ‘war for manager talent’ which has changed the nature of the corporation. Rather than machinery and the factory, managerial talent has become the new asset of the firm. The challenge for firms is how can they prevent managers from leaving the firm when international trade creates new career opportunities for them outside the firm. In this paper I test the hypothesis whether international trade has triggered a competition for managers a ’war for talent’ through the entry of foreign firms. I use new survey data on German and Austrian executives, their characteristics and the human resource policies of their firms combined with other data sources to test this hypothesis in two ways. First, I examine whether more foreign competition leads firms to increase their participation in talent fairs to search and attract talent. Second, I examine whether seniority-related CEO pay varies for di erent levels of foreign competition. Do firms increase CEO pay when faced with the threat of losing their senior executives to foreign competitors? I find that firms