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Economies of scale can explain compensation differentials over time across firms of different size different hierarchy-levels and different industries. Consequently the most talented individuals tend to match with the largest firms in industries where marginal returns to their talent are greatest. We explore a new dimension of this size-pay nexus by showing that marginal returns also differ across activities within firms and industries. Using hand-collected data on managers in European banks well below the level of executive directors we find that the size-pay nexus is strongest for investment banking business units and for banks with a market-based business model. Thus managerial compensation is most sensitive to size increases for activities that can easily be scaled up. |
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