Abstract

http://ssrn.com/abstract=2424860
 


 



Growth Through Rigidity: An Explanation for the Rise in CEO Pay


Kelly Shue


University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Richard R. Townsend


Tuck School of Business at Dartmouth

December 8, 2015

Journal of Financial Economics (JFE), Forthcoming

Abstract:     
The dramatic rise in CEO compensation during the 1990s and early 2000s is a long-standing puzzle. In this paper, we show that much of the rise can be explained by a tendency of firms to grant the same number of options each year. Number-rigidity implies that the grant-date value of option awards will grow with firm equity returns, which were very high on average during the tech boom. Further, other forms of CEO compensation did not adjust to offset the dramatic growth in the value of option pay. Number-rigidity in options can also explain the increased dispersion in pay, the difference in growth between the US and other countries, and the increased correlation between pay and firm-specific equity returns. We present evidence that number-rigidity arose from a lack of sophistication about option valuation that is akin to money illusion. We show that regulatory changes requiring transparent expensing of the grant-date value of options led to a decline in number-rigidity and helps explain why executive pay increased less with equity returns during the housing boom in the mid-2000s.

Number of Pages in PDF File: 52

Keywords: money illusion, executive compensation, CEOs, rigidity


Open PDF in Browser Download This Paper

Date posted: April 15, 2014 ; Last revised: March 22, 2016

Suggested Citation

Shue, Kelly and Townsend, Richard R., Growth Through Rigidity: An Explanation for the Rise in CEO Pay (December 8, 2015). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: http://ssrn.com/abstract=2424860 or http://dx.doi.org/10.2139/ssrn.2424860

Contact Information

Kelly Shue (Contact Author)
University of Chicago - Booth School of Business ( email )
5807 S Woodlawn Avenue
Chicago, IL 60637
United States
HOME PAGE: http://https://sites.google.com/site/kellyshue/

Chicago Booth School of Business Logo

National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Richard R. Townsend
Tuck School of Business at Dartmouth ( email )
Hanover, NH 03755
United States
Feedback to SSRN


Paper statistics
Abstract Views: 3,267
Downloads: 660
Download Rank: 27,486

© 2016 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollobot1 in 0.219 seconds