1. 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 dItalia

2. 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) contribution of the paper

3. outline sampling multivariate analysis - firm heterogeneity and pay-size elasticity - return to education other comments conclusions

4. sampling 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.

5. sampling …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)

6. sampling 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)

7. sampling Suggestion: - Take into account sampling weights.

8. 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).

9. item nonresponse The authors say that some firms were excluded as they refused to divulge their amount of CEO compensation. Suggestion: -The number of nonresponding firms should be indicated and compared with sampling size -Item nonresponse should be controlled for in case

10. item nonresponse E.g. 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)

11. 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.

12. 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...

13. 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.

14. 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)

15. multivariate analysis Zhou (2000) models variations of the pay-size elasticity for firms having different size. (he finds a higher elasticity for larger firms).

16. 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).

17. multivariate analysis Size distribution: Firm heterogeneity within the period. (the survey may include firms having less than 500 employees)

18. multivariate analysis Size distribution: Firm heterogeneity across periods In 2003 the median size of firms was lower than in 1993.

19. multivariate analysis Suggestion: 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)

20. 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.

21. multivariate analysis Suggestion: Interact pay-sale elasticity with legal type

22. 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. Suggestion: Interact the Graduate and College degree dummies with - family ownership, - age of firms, - size of firms.

23. other comments Different specifications between the 1993 and 2003 models prevent the comparison of results, all being equal: - firms D&B Credit Score is included only in the 2003 model Suggestion: Presenting a model for 2003 by removing firms D&B Credit Score (which apparently correlates with RoA)

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

25. other comments The interaction term: Ownership*C-corporation 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.

26. other comments As a corollary… Interactions between pay-size elasticity and or size (or complexity) may signal the extent of the measurement error… The Surveys question on executive pay is: Which is the total amount of officers compensation?, (not CEO pay)

27. 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.

28. conclusions 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.

29. conclusions 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.

30. Thanks for your attention.

32. Trhoughout the regression

34. Firm heterogeneity and measurement error Chrinsmans (2007) (Privately held family firms, US) Number of employees (mean) = 32 Number of family managers (mean) = 2.5 Cole & Mehrans 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 & Mehrans sample Total assets (median) = $ 575,000 (1993) Total assets (third quartile) = $ 2,315,000 (1993)

35. assets employment sales Pay-size elasticity, by quartiles of the size distribution blu: 1993 brown: 2003