Why Has CEO Pay Increased so Much?

47 Pages Posted: 31 Oct 2008

See all articles by Xavier Gabaix

Xavier Gabaix

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Augustin Landier

HEC

Multiple version iconThere are 4 versions of this paper

Date Written: July 2006

Abstract

This paper develops a simple equilibrium model of CEO pay. CEOs have differenttalents and are matched to firms in a competitive assignment model. In market equilib-rium, a CEO s pay changes one for one with aggregate firm size, while changing muchless 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 six-fold increase of CEO pay between 1980 and 2003 can be fully attributed to the six-foldincrease in market capitalization of large US companies during that period. We find a very small dispersion in CEO talent, whichnonetheless justifies large pay differences.The data broadly support the model. The size of large firms explains many of the pat-terns in CEO pay, across firms, over time, andbetween countries. (JEL D2, D3, G34,J3).

Keywords: Executive compensation, wage distribution, corporate governance, Roberts law, Zipf s law, scaling, extreme value theory, superstars, calibratable corporate finance

Suggested Citation

Gabaix, Xavier and Landier, Augustin, Why Has CEO Pay Increased so Much? (July 2006). NYU Working Paper No. CLB-06-011. Available at SSRN: https://ssrn.com/abstract=1291579

Xavier Gabaix (Contact Author)

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Augustin Landier

HEC ( email )

France
+33630006051 (Phone)

HOME PAGE: http://https://sites.google.com/site/augustinlandier/

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