SSRN-Why Has CEO Pay Increased so Much? by Xavier Gabaix, Augustin Landier
This paper develops a simple competitive model of CEO pay. A large part of the rise in CEO compensation in the US economy is explained without assuming managerial entrenchment, mishandling of options, or theft. CEOs have observable managerial talent and are matched to assets in a competitive assignment model. Under very general assumptions, using results from extreme value theory, the model determines the level of CEO pay across firms over time, and the pay-sensitivity relations. The model predicts a cross-sectional constant-elasticity relation between pay and firm size. It also predicts that the level of CEO compensation should increase one for one with the average market capitalization of large firms in the economy. Therefore, the six-fold increase of CEO pay between 1980 and 2003 can be fully attributed to the six-fold increase in market capitalization of large US companies. The model can also be used to study other large changes at the top of the income distribution, and offers a benchmark for calibratable corporate finance. We find a minuscule dispersion of CEO talent, which nonetheless justifies large pay levels and differences. The empirical evidence is broadly supportive of our model. The size of large firms explains many of the patterns in CEO pay, in the time series, across industries and across countries.
CEO's are just sharing in the profits
The real reason is that the management sets everyone's compensation including their own. So, the Board votes the CEO and themselves a generous compensation package, and the staff get peanuts in comparison.
Since the CEO appoints the Board and the Board appoints the CEO, it is clear that they both deserve a huge payback. A man of words and not of deeds is like a garden full of weeds; a man of deeds and not of words is like a garden full of turds — Anonymous
One Director I knew blew £100M on an IT project to "e-transform" the business with virtually no positive benefits for the business other than the "learnings" gained. I am not aware of it having adversely effected his career although he has recently left the business - c. 7 years later- which is several lifetimes in terms of the corporate career culture nowadays. So no-one would have remembered his earlier project in any case.. notes from no w here
Properly, CEO compensation is still a "remuneration cost"
Salary (a "remuneration cost") is a component of Operating Expenses. Salary is however only a portion of total compensation afforded employees. Stock options, for example, are not an operating expense. Allocation of certificates held or withheld from future issues is a Balance Sheet (credit event) description of total assets.
Deferred cash compensation and schedule distribution typically are not represented in any one consolidated financial statement, as corporate officers routinely reserve disclosure of profit (loss) attributable to the activities of special purpose entities (SPEs) such as bonus pools and subsidiary trust funds in which "c-level" (recall Hank Greenberg, AIG) hold ownership interests. Diversity is the key to economic and political evolution.
It is not clear to me from the abstract you quote whether it deals with these questions.
- Jake If you only spend 20 minutes of the rest of your life on economics, go spend them here.
