CEO Wage Dynamics: Estimates from a Learning Model

53 Pages Posted: 3 Oct 2010 Last revised: 8 May 2013

See all articles by Lucian A. Taylor

Lucian A. Taylor

University of Pennsylvania - The Wharton School

Date Written: October 16, 2012


The level of Chief Executive Officer (CEO) pay responds asymmetrically to good and bad news about the CEO’s ability. The average CEO captures approximately half of the surpluses from good news, implying CEOs and shareholders have roughly equal bargaining power. In contrast, the average CEO bears none of the negative surplus from bad news, implying CEOs have downward rigid pay. These estimates are consistent with the optimal contracting benchmark of Harris and Holmstrom (1982) and do not appear to be driven by weak governance. Risk-averse CEOs accept significantly lower compensation in return for the insurance provided by downward rigid pay.

Keywords: CEO, compensation, learning, dynamics, bargaining, SMM

JEL Classification: D83, G34, J31, J33, J41

Suggested Citation

Taylor, Lucian A., CEO Wage Dynamics: Estimates from a Learning Model (October 16, 2012). Journal of Financial Economics (JFE), Vol. 108, No. 1, 2013. Available at SSRN: or

Lucian A. Taylor (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States


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