Abstract

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The Growth of Executive Pay


Lucian A. Bebchuk


Harvard Law School; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)

Yaniv Grinstein


Cornell University - Samuel Curtis Johnson Graduate School of Management


Oxford Review of Economic Policy, Vol. 21, pp. 283-303, 2005
Harvard Law and Economics Discussion Paper No. 510

Abstract:     
This paper examines both empirically and theoretically the growth of U.S. executive pay during the period 1993-2003. During this period, pay has grown much beyond the increase that could be explained by changes in firm size, performance and industry classification. Had the relationship of compensation to size, performance and industry classification remained the same in 2003 as it was in 1993, mean compensation in 2003 would have been only about half of its actual size. During the 1993-2003 period, equity-based compensation has increased considerably in both new economy and old economy firms, but this growth has not been accompanied by a substitution effect, i.e., a reduction in non-equity compensation. The aggregate compensation paid by public companies to their top-five executives during the considered period added up to about $350 billion, and the ratio of this aggregate top-five compensation to the aggregate earnings of these firms increased from 5% in 1993-1995 to about 10% in 2001-2003. After presenting evidence about the growth of pay, we discuss alternative explanations for it. We examine how this growth could be explained under either the arm's length bargaining model of executive compensation or the managerial power model. Among other things, we discuss the relevance of the parallel rise in market capitalizations and in the use of equity-based compensation.

The figures and tables from this paper are available for downloading at Lucian Bebchuk's home page.

Number of Pages in PDF File: 36

Keywords: executive compensation, equity-based compensation, cash compensation, growth of compensation, managerial power

JEL Classification: D23, G32, G38, J33, J44, K22, M14

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Date posted: January 14, 2005 ; Last revised: April 29, 2009

Suggested Citation

Bebchuk, Lucian A. and Grinstein, Yaniv, The Growth of Executive Pay. Oxford Review of Economic Policy, Vol. 21, pp. 283-303, 2005; Harvard Law and Economics Discussion Paper No. 510. Available at SSRN: http://ssrn.com/abstract=648682 or http://dx.doi.org/10.2139/ssrn.648682

Contact Information

Lucian A. Bebchuk (Contact Author)
Harvard Law School ( email )
Cambridge, MA 02138
United States
617-495-3138 (Phone)
617-812-0554 (Fax)
HOME PAGE: http://www.law.harvard.edu/faculty/bebchuk/
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Centre for Economic Policy Research (CEPR) and European Corporate Governance Institute (ECGI)
Yaniv Grinstein
Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )
Sage Hall
Ithaca, NY 14853
United States
607-255-8686 (Phone)
607-254-4590 (Fax)

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