Why Has CEO Pay Increased So Much?
July 31, 2006
From a new NBER paper by Xavier Gabaix and Augustin Landier:
Our central equation predicts that a CEO’s pay is increasing in both the size of his firm and the size of the average firm in the economy. The cross-sectional relationship between firm size and compensation has been well documented empirically. Moreover, the role of average firm size provides a novel explanation of the rapid surge in US CEO pay since 1980. While previous papers attribute this trend to incentive concerns or managerial entrenchment, we show that it can be explained by the scarcity of CEO talent, competitive forces and the six-fold increase in firm size over the same period.