Entrepreneurial Experience and Executive Pay

Executive compensation is determined in a competitive market, and small differences in skills lead to large variations in the compensation levels. While past research has predominantly focused on the distinction between general and specific managerial skills, little is known as to whether and how a history of entrepreneurial experience influences CEO compensation. This paper uses rich data from the registers of Denmark to identify and compare managers with and without entrepreneurial experience. Descriptive statistics show that former entrepreneurs tend to become CEOs in smaller and younger firms, yet they still receive higher compensations, on average. After accounting for the impact of observed and unobserved heterogeneity, we find that there is indeed a premium for entrepreneurial experience in the market for CEO, although it varies in different circumstances. In particular, the premium is only present when the entrepreneurial spell happened recently, in a related industry, and was successful. These findings reflect that, although entrepreneurial experience may not be a sufficiently strong signal per se, hiring firms are willing to offer an excess pay for former entrepreneurs if the right conditions apply