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Authors:

• Peter L. SWAN
  University of New South Wales

• Teddy OETOMO
  The University of Sydney

We present the first empirical evidence in support of Rosen’s (1982) ‘cloning’ hypothesis, explaining the firm size-executive pay effect in terms of a predicted greater superiority of managerial talent the larger is the firm. We show that executives from better performing firms are more likely to join larger firms. Moreover, a misspecification arises if actual firm size is used in pay-performance sensitivity estimation. A significantly smaller size effect on pay results after correcting for specification bias. Remarkably, the prior performance of the firm that previously employed the executive is a more significant determinant of the executive’s pay with the current employer than is current firm performance during the tenure of the executive in her new company.