Reportgreen2006

Why Has CEO Pay Increased So Much?

276 citations0/0 files storedNational Bureau of Economic Research

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Corporate Finance and Governance Labor market dynamics and wage inequality Merger and Competition Analysis

Abstract

This paper develops a simple equilibrium model of CEO pay.CEOs have different talents and are matched to firms in a competitive assignment model.In market equilibrium, a CEO's pay changes one for one with aggregate firm size, while changing much less with the size of his own firm.The model determines the level of CEO pay across firms and over time, offering a benchmark for calibratable corporate finance.The sixfold increase of CEO pay between 1980 and 2003 can be fully attributed to the six-fold increase in market capitalization of large US companies during that period.We find a very small dispersion in CEO talent, which nonetheless justifies large pay differences.The data broadly support the model.The size of large firms explains many of the patterns in CEO pay, across firms, over time, and between countries.

Citations in this library

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References

1999Corporate Ownership Around the World 2003Corporate Governance and Equity Prices 1997Industry costs of equity 1990Performance Pay and Top-Management Incentives 1997Modelling Extremal Events 1978On the Size Distribution of Business Firms 1987Extreme Values, Regular Variation and Point Processes 2003Executive Compensation as an Agency Problem

Cited by

2008Power Laws in Economics and Finance 2009The long-run determinants of inequality: What can we learn from top income data?2011Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities 2007The changing nature of wage inequality 2016A Supply and Demand Framework for Two-Sided Matching Markets 2010Large Risks, Limited Liability, and Dynamic Moral Hazard 2015Frontier Firms, Technology Diffusion and Public Policy

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