What determines managers' pay?: Evidence from Denmark

The aim of this article is threefold. Firstly, to add to the small literature explaining managerial pay outside of the top 100 or 500 US and UK companies. Secondly, to explain firms' choices of the methods of pay for their managerial employees, and thirdly, to provide estimates of the effects of performance pay on individual earnings, at the same time distinguishing between selection and incentive effects. I use an unbalanced five-year panel data set of about 8,500 individual-year observations from a sample of Danish firms during the four-year period 1992 to 1995. I Find pay differentials to be determined mainly by job positions and authority and performance-related pay to be more closely related to the characteristics of the firm than to those of the individual. Finally, the incentive and selection effects of performance pay are estimated to be 8 and 3 per cent, respectively. (C) 2000 Elsevier Science Ltd. All rights reserved.