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What do we know about executive compensation at privately held firms?. Rebel A. Cole DePaul University - Chicago Hamid Mehran Federal Reserve Bank of New York Discussant: Massimiliano Stacchini Banca d’Italia. contribution of the paper.

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what do we know about executive compensation at privately held firms

What do we know about executive compensation at privately held firms?

Rebel A. Cole

DePaul University - Chicago

Hamid Mehran

Federal Reserve Bank of New York

Discussant: Massimiliano Stacchini

Banca d’Italia


contribution of the paper

The paper makes a significant contribution to the literature on executive pay at privately held firms…

…. which has been strongly limited by lack of data.

‘Published studies on compensation in privately held firms are essentially nonexistent because the data generally has not been accessible’.

Kee, et al (1999)



multivariate analysis

- firm heterogeneity and pay-size elasticity

- return to education

other comments



Analysis on privately held firms is based on data from 2 samples of firms conducted in 1993 and 2003 (SSBF).

The Surveys rely on a stratified random sampling design.


…Consistency between population and sample is provided for by sampling weights…

Some groups are over sampled (e.g., employee groups of size 20 and above), and the surveys contain weights to ensure that sample statistics represent the population.

(Herrants et al. 2009)


‘Stylised facts’ apparently do not control for the structure of the sampling design

(i.e. sampling weights are omitted)

..even if the risk of sampling error seems to be non negligible…

(the sampling fraction is around 0.002)

The total population of S-Corp and C-corp consists of about

2,400,000 firms in 1993 (2,800,000 firms in 2003)

and is represented by

4,356 firms in 1993 (4,240 firms in 2003)

The ‘final’ C&M sample consists of:

1,630 firms for 1993 (1,668 firms for 2003)

(obtained by excluding firms who refused to response, firms whose the primary owner is not the day-to day manager and public firms)



- Take into account sampling weights.

item nonresponse
item nonresponse

Item nonresponse is significant in SSBF.

‘The 2003 Survey of Small Business Finances (SSBF) screening interview had significant unit nonresponse and therefore some type of nonresponse adjustment was deemed necessary’

(Federal Reserve Board Finance and Discussion Series Paper, 2007).

item nonresponse9
item nonresponse

The authors say that some firms were excluded as they refused to divulge their amount of CEO compensation.


  • The number of nonresponding firms should be indicated and compared with sampling size
  • Item nonresponse should be controlled for in case
item nonresponse10
item nonresponse


Are non responding firms more likely to combine high compensations with low-performances than their peers?

(correlating characteristics of nonresponding firms to the Ceo pay question, with those of responding firms, that exhibit this pattern)

multivariate analysis
multivariate analysis

The authors find a much higher pay-size elasticity at private companies than for public firms…

…but also a drop of the pay-size elasticity for privately held firms from 1993 to 2003.

multivariate analysis12
multivariate analysis

…which is supposed ‘to be driven by the growing familiarity with the use of the 0.30 benchmark among accountants of privately held firms’...

multivariate analysis13
multivariate analysis

Do heterogeneous pay-size elasticities exist within privately held firms?

If differences exist but are not modelled,

a variation in the firms’ composition could translate in an apparent variation of the estimated (single coefficient for) pay-size elasticity.

multivariate analysis14
multivariate analysis

‘The relatively uniformity of the elasticity of executive pay with respect to scale across firms, industries, countries and periods of time is puzzling

because the technology which sustains control and scale should vary across these disparate units of comparison’.

Rosen (1990)

multivariate analysis15
multivariate analysis

Zhou (2000) models variations of the pay-size elasticity for firms having different size.

(he finds a higher elasticity for larger firms).

multivariate analysis16
multivariate analysis

Kostiuk (1990)

- models firm heterogeneity by interacting ‘pay-size elasticity’ with ‘capital intensity’ (capital–labor ratio)

(pay-size elasticity is lower at firms having higher capital-labor ratios).

multivariate analysis17
multivariate analysis

Size distribution: Firm heterogeneity within the period.

(the survey may include firms having less than 500 employees)

multivariate analysis18
multivariate analysis

Size distribution: Firm heterogeneity across periods

In 2003 the median size of firms was lower than in 1993.

multivariate analysis19
multivariate analysis


Interact pay-sale elasticity with

  • Proxies for firms’ complexity
  • Proxies for firms’ dimension

E.g. ‘Large’ (=1 for firms having sales larger than the sample median), Zhou (2000)

multivariate analysis20
multivariate analysis

Legal type: heterogeneity across periods

C-corporations account for:

  • 60% of sampling firms in 1993
  • 30% of sampling firms in 2003

The relative importance of C-corporation (vs S-corporation) get reversed across periods.

multivariate analysis21
multivariate analysis


Interact pay-sale elasticity with ‘legal type’

return to education
return to education

Return to education may be expected to vary with ‘family ownership’.

…Coeteris paribus, return to education for a manager of a relatively large private firm inherited by the family may differ from that for a manager starting a new enterprise.


Interact the ‘Graduate’ and ‘College’ degree dummies with

- family ownership,

- age of firms, - size of firms.

other comments
other comments

Different specifications between the 1993 and 2003 models prevent the comparison of results, ‘all being equal’:

- ‘firm’s D&B Credit Score’ is included only in the 2003 model


Presenting a model for 2003 by removing ‘firm’s D&B Credit Score’

(which apparently correlates with RoA)

other comments24
other comments

Regressions for pay-size elasticity, including the entire list of determinants, are available for sale as a measure of size.

In addition, ‘pay-assets’, ‘pay-employment’ elasticities are even scrutinized by C&M in the bivariate section…

…and by other authors.


Regressions for pay-size elasticity, including the entire list of controls, should be presented even for ‘pay-assets’ and ‘pay-employment’.

other comments25
other comments

The interaction term:


is discussed in the text…

(The relation Ceo pay vs ownership is stronger at C-corporations)

…. but apparently is not included in the set of regressions.

other comments26
other comments

As a corollary…

Interactions between pay-size elasticity and or size (or complexity) may signal the extent of the ‘measurement error’…

The Survey’s question on executive pay is:

‘Which is the total amount of officers’ compensation? ‘,

(not CEO pay)

other comments27
other comments

Exercises conducted by C&M seem to indicate that the measurement error is low.

The measurement error is expected to increase with firms’ size.

If interactions between pay-size elasticity and size, after controlling for the other determinants, prove to be insignificant…

…the measurement error would be implicitly negligible.


The paper is definitely original, full of information, and very enjoyable to read.

The empirical analysis is comprehensive and shed light on important up till now obscure issues.


Compositions effects may have an impact on the results.

Among privately held firms, heterogeneity in size and complexity should be properly dealt with.

Causal effects, controlling for endogeneity, have still to be scrutinized.

firm heterogeneity and measurement error
Firm heterogeneity and measurement error

Chrinsman’s (2007) (Privately held family firms, US)

Number of employees (mean) = 32

Number of family managers (mean) = 2.5

Cole & Mehran’s sample

Number of employees (third quartile) = 62 (1993) ,

53 (2003)

Eisemberg (1998) (Closely held firms, Finland)

Total assets (median) = $ 800,000

Board size (median) = 3

Cole & Mehran’s sample

Total assets (median) = $ 575,000 (1993)

Total assets (third quartile) = $ 2,315,000 (1993)


Pay-size elasticity, by quartiles of the size distribution

blu: 1993

brown: 2003