The Geography of Executive Compensation

Various papers have recently documented that distance matters in economic transactions. There are several reasons to believe it could matter in executive compensation as well, in the sense that CEO compensation may depend on how much geographically-close CEOs earn. These include: (i) the force of local labor market competition for CEOs; (ii) the effect of "leading firms" in the vicinity as suggested by the literature on social interaction; and (iii) envy among geographically-close CEOs endowed with relative-consumption preferences. In this paper, I first examine whether geography does matter for CEO compensation, and then explore the possible reasons for this relationship. I find strong evidence that geography matters for executive compensation: CEO compensation (salary and cash compensation) is positively and significantly related to the level of compensation of CEOs of firms headquartered within a 100-kilometer or 250-kilometer radius. The results suggest that if CEOs within a 100-kilometer radius enjoyed a $1 salary increase in the previous year, the CEO will experience a $0.29 increase in salary this year ceteris paribus. These results are obtained while controlling for previously-documented factors that affect CEO compensation, including CEO age, CEO tenure, firm size, growth options, and firm performance. Since CEO pay is typically benchmarked against that earned at industry peers of similar size, the regressions include the average compensation at similar-sized firms in the same industry. The ACCRA Cost of Living Index is used to control for differences in the cost of living. Year and industry fixed effects are included in all regressions; results are similar when state fixed effects are added or when firm fixed effects are used instead of industry fixed effects. All results are based on each firm's actual location in each year - since Compustat only reports the most recent headquarter location, this data is hand-collected for each sample firm. An examination of what drives this relationship between geography and executive compensation reveals that the results are most consistent with envy. Robustness checks are conducted to deal with issues related to potentially omitted variables and endogeneity, and the results survive these checks.