THE ROLE OF CEO SALARY IN DRIVING FIRM PRODUCTIVITY: SECTORAL EVIDENCE FROM PORTUGAL USING LASSO AND GROUP LASSO METHODS

This study aims to identify the economic sectors in Portugal in which the Chief Executive Officer (CEO) salary affects firm productivity. The analysis focuses primarily on estimation using a matched employer-employee dataset within a high-dimensional setting, encompassing various Portuguese economic sectors. To address the issue of overfitting common in these scenarios, the framework draws on machine learning and variable selection research to apply data-driven methods for choosing economic sectors. Specifically, we utilize Least Absolute Shrinkage and Selection Operator (LASSO) techniques to select relevant economic sectors in which CEO salary has an impact on firm productivity. The persistently selected economic sectors are real estate promotion, specialized construction, telecommunications, accommodation and food services, which reveals the prevalent business paradigm in Portugal. Among the selected 45 economic sectors, we highlight two sectors that exhibit a positive relationship between CEO salary and firm productivity: telecommunications sector and residential care within the non-profit sector.