Abstract

http://ssrn.com/abstract=901826
 
 

References (82)



 
 

Citations (249)



 


 



Why Has CEO Pay Increased so Much?


Xavier Gabaix


New York University - Stern School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Augustin Landier


Toulouse School of Economics

May 8, 2006

MIT Department of Economics Working Paper No. 06-13

Abstract:     
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.

Number of Pages in PDF File: 39

Keywords: Executive compensation, wage distribution, pay performance sensitivity, extreme value, theory, superstars, calibratable corporate finance

JEL Classification: D2, D3, G34, J3

working papers series


Download This Paper

Date posted: May 16, 2006  

Suggested Citation

Gabaix, Xavier and Landier, Augustin, Why Has CEO Pay Increased so Much? (May 8, 2006). MIT Department of Economics Working Paper No. 06-13. Available at SSRN: http://ssrn.com/abstract=901826 or http://dx.doi.org/10.2139/ssrn.901826

Contact Information

Xavier Gabaix (Contact Author)
New York University - Stern School of Business ( email )
Stern School of Business
44 West 4th Street, Suite 9-190
New York, NY 10012-1126
United States
HOME PAGE: http://pages.stern.nyu.edu/~xgabaix/
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
European Corporate Governance Institute (ECGI)
c/o ECARES ULB CP 114
B-1050 Brussels
Belgium
Augustin Landier
Toulouse School of Economics ( email )
Place Anatole-France
Toulouse Cedex, F-31042
France
Feedback to SSRN


Paper statistics
Abstract Views: 11,186
Downloads: 2,422
Download Rank: 1,590
References:  82
Citations:  249

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo8 in 0.375 seconds