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. All regressions also include the average CEO compensation at similar-sized industry peers, and proxies for local market conditions to ensure that the results are not driven by differences in per-capita income or the cost of living. Year and industry fixed effects are included in all regressions; the results are similar when state fixed effects are added or when firm fixed effects are used instead of industry fixed effects. The results are robust to using a variety of alternative specifications. Similar results are obtained using instrumental variable regressions to deal with potential endogeneity concerns. An examination of what drives this relationship between geography and executive compensation reveals that the results are most consistent with envy.