Search Intermediaries, Internal Labor Markets, and CEO Pay

Executive search firms play a major role in the hiring decisions of executives, yet their impact on executive pay and firms' internal labor markets remain unexplored. In this paper, we present a model that attempts to fill this gap. The model relates the escalation of CEO pay to a decline in firms' internal labor markets and less competition for the CEO position within the firm. The latter, in turn, is the result of more efficient executive search firm activity, and, in the presence of such activity, to an increase in the importance of "general" as opposed to "firm-specific" managerial skills. The model implies that CEO pay, the pay gap between the CEO and non-CEO executives, the variance of pay, and the importance of outside to inside successions for CEO positions, will increase together as search activity becomes more efficient or general skills become more important. The time-series implications of the model are consistent with U.S. evidence