Why Has CEO Pay Increased so Much?

48 Pages Posted: 24 Jul 2006 Last revised: 16 Oct 2021

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 different talents and are matched to firms in a competitive assignment model. In market equilibrium, a CEO%u2019s pay changes one for one with aggregate firm size, while changing much less 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 sixfold increase of CEO pay between 1980 and 2003 can be fully attributed to the six-fold increase in market capitalization of large US companies during that period. We find a very small dispersion in CEO talent, which nonetheless justifies large pay differences. The data broadly support the model. The size of large firms explains many of the patterns in CEO pay, across firms, over time, and between countries.

Suggested Citation

Gabaix, Xavier and Landier, Augustin, Why Has CEO Pay Increased so Much? (July 2006). NBER Working Paper No. w12365, Available at SSRN: https://ssrn.com/abstract=918963

Xavier Gabaix (Contact Author)

Harvard University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Augustin Landier

HEC ( email )

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