DP16475 Networks and Manager Pay: Evidence from Time-Varying Exogenous Metrics

Author(s): Sharmin Sazedj, José Tavares
Publication Date: August 2021
Keyword(s): Manager Pay, networks, productivity, Rent extraction
JEL(s): J24, J30, L14
Programme Areas: Organizational Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16475

In this paper we assess the quantitative impact of a top manager's network on pay, using a novel dataset that comprehends the entire career of top managers for the universe of business firms in Portugal. We construct 5 different network metrics that are sensitive to exogenous variation. Further, we analyze these metrics using high dimensional fixed effects models and instrumental variable procedures to address thoroughly endogeneity concerns. We confirm that networks are associated to higher manager pay, both base wage and bonus. A one standard deviation increase in the number of connections is associated to a 8% higher bonus and 5% higher total pay. The depth of the connections prevails over mere number, while indirect measures capturing the information value of networks also matter. Finally, well connected managers that have access to private information not only further their career options and their bargaining power, they also benefit the firm. In other words, our results suggest that, from the firm's perspective, productivity gains associated to large-network managers go beyond the pay premium, so that networks are not overpaid.