External Labor Markets and the Importance of Credentials to Executive Pay

This paper examines the importance of externally observable individual qualifications in predicting executive compensation and how this differs between external and internal markets. It provides evidence that information asymmetries between internal and external markets drive stronger reliance on credentials such as education and work experience for determining compensation in external markets. Salaries prior to and after an external job placement for executive job switchers are modeled, and results show that credentials are nearly twice as important on the external market, explaining 9% of salary variance, compared to a contribution of only 5% in prior job settings. Additionally, this paper examines differences in importance by type of qualification and type of executive. Experience evincing general capabilities is found to be more important than experience aligned with the industry and function of the position. The increase in importance of credentials in the external market setting is more pronounced a...