Pay Multiple and Firm Performance: Korean Evidence

Do competent managers increase labor productivity? Evidence from Korea

“…Chung et al (2017) studied listed firms from 2005 to 2014, confirming that the higher the managerial ability, the lesser the over-investment or under-investment and therefore the higher the investment efficiency. Yim and Kim (2018) studied domestic-listed firms from 2004 to 2016, using two groups with high and low managerial abilities. They argued that compensation gap has a negative effect on firm performance in the group with low managerial ability.…”

“…Measuring managerial ability involves a two-step method (Demerjian et al., 2012; Ko and Jung, 2016; Yim and Kim, 2018). In the first step, DEA is performed, and in the second, the residual value is obtained by subtracting the measure of firm characteristics from the firm's relative efficiency score calculated in the first step.…”

“…Unfortunately, Korea did not provide working hours data for individual firms, so it could not be used as one of the measures of labor productivity. The measurement of labor productivity based on value-added is shown in Equation ( 6 (Demerjian et al, 2012;Ko and Jung, 2016;Yim and Kim, 2018). In the first step, DEA is performed, and in the second, the residual value is obtained by subtracting the measure of firm characteristics from the firm's relative efficiency score calculated in the first step.…”

“…Subsequent studies argue that managerial ability can be measured using the residual obtained after subtracting the firm's characteristic factors from its total output (Demerjian et al, 2012). As this approach measures overall managerial ability while overcoming the weaknesses of existing fragmentary measures of managerial ability, it is increasingly being used in research on managerial ability, firm value and performance (Gan and Park, 2017;Ko et al, 2013;Rajgopal et al, 2006;Yim and Kim, 2018).…”