The Hidden Forces Behind CEO Pay

When it comes to CEO pay, big numbers tend to grab the headlines. But behind those figures is a more complex story — one that’s less about executives jumping ship for better offers and more about the firm-specific knowledge they develop over time.

In this Q&A, assistant professor of finance John Barry explains how his research reshapes the way we think about executive compensation.

RBW: Tell us about your latest working paper “Human Capital, Competition and Mobility in the Managerial Labor Market.”

John Barry: Our paper looks at what really drives CEO pay and mobility. An accepted academic explanation has been that CEOs earn more because they have general skills that make them valuable to any company — and in a competitive market, firms have to pay big to attract that talent. But in reality, the CEO job market isn’t so frictionless. Mobility has dropped sharply, and most CEOs are promoted from within a firm rather than hired from the outside.

So, my co-authors and I took a different approach. We looked at the mix of general versus firm-specific skills that CEOs bring to the table. Our model helps explain why CEO pay remains high even when executives rarely switch jobs — as well as why companies are often willing to pay more to keep the CEO they already have.

RBW: Can you say more about the differences between “general” and “firm-specific” skills, and how they impact CEO pay?

Barry: General skills are abilities a CEO can use at any company, such as the kind of financial modeling or leadership techniques you might learn in an MBA program. These skills apply broadly across firms, which is why they tend to boost a CEO’s value on the job market. 

By contrast, firm-specific skills are tied to a particular company. Think of a CEO who knows how to navigate the company’s unique internal dynamics. Abilities like that are hard to transfer, which makes it a priority to keep the current CEO.

Our research helps explain how CEO pay can stay high even when executives rarely move between firms. Traditional explanations focus on outside job offers driving up pay. But we show that firms are often willing to pay a premium to keep CEOs with deep, firm-specific skills because those skills are hard to replace.

RBW: How does your paper measure general vs. firm-specific skills? And how do these different skill types affect CEO compensation?

Barry: We focused on how much of a CEO’s skillset is general — meaning, useful across companies — versus firm-specific. And we found that firm-specific skills play a much bigger role in determining CEO pay than previously thought. These skills can be hard to transfer, but they’re incredibly valuable to the firm. 

For example, CEO leadership might be uniquely suited to strengthen the company culture. Companies are willing to pay a premium to keep CEOs whose knowledge and leadership are deeply embedded in their operations. These skills also make CEOs less likely to switch jobs, since they’re most effective where they already are.

RBW: Is it a bad thing that firm-specific skills reduce CEO mobility?

Barry: Firm-specific skills make a CEO especially valuable to their current employer, giving companies a strong incentive to match outside offers. As a consequence, it becomes less common for CEOs to switch jobs. So, reduced mobility is not necessarily a bad thing for executives; in fact, it can work in their favor. Because companies often don’t want to lose firm-specific expertise, they’re often willing to raise compensation to keep the CEO in place.

To use a nonmanagerial example: Think of a software engineer who built a company’s core platform. When a competitor tries to poach her, her current team would likely be willing to offer her a raise rather than risk losing all that critical knowledge. The same logic applies at the top.

RBW: There’s been a lot of public discussion about the growth of CEO pay. How does your research fit into that conversation?

Barry: Our research sheds light on why CEO pay can remain high even when executives rarely move between firms. Traditional explanations emphasize outside job offers driving up compensation. But we find that companies are often willing to pay a premium to keep CEOs whose firm-specific skills are difficult to replace.

Our paper doesn’t weigh in on whether pay levels are appropriate, but it does underline an important piece of the puzzle. The embedded skills of a CEO — and the costs of potentially replacing them — play a significant role in shaping compensation.

RBW: If readers take one idea from your paper, what should it be?

Barry: Companies and CEOs have a mutual investment in one another. Companies value firm-specific skills, of course, but CEOs value them as well. Over time, CEOs develop knowledge and skills that become both difficult to replace and difficult take somewhere else. So, companies have a strong incentive to pay CEOs to retain them, and CEOs are highly motivated to stay.

The question of CEO pay is not just influenced by outside offers or a perceived lack of general talent. It’s about the value of retaining company-specific knowledge in leadership.

Lyman, Barry and Zhao. “Human Capital, Competition and Mobility in the Managerial Labor Market.” (2025): Working paper.