CEO Wage Dynamics: Estimates from a Learning Model
53 Pages Posted: 3 Oct 2010 Last revised: 8 May 2013
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: Suggested Citation