CEO Pay and Firm Size: an Update after the Crisis

Abstract

In the 'size of stakes' view quantitatively formalised in Gabaix and Landier (2008) Executive compensation remains very much at the center-stage of academic and policy debates. A relative lack of consensus seems to prevail regarding the origins of the large rise of executive compensation observed in the US since the 70s. According to some scholars (see e.g. Bebchuck and Fried (2004) for a summary of this view), rising compensation is due to a higher ability of CEOs to extract rents from shareholders, e.g. by capturing their board (Shivdasani and Yermack, 1999) or appointing compensation consultants that cater to their interests (Murphy and Sandino, 2010). Hermalin (2005) argues instead that the rise in CEO pay reflects tighter corporate governance: pay increases to compensate CEOs for the greater risk of being fired. Others argue that the very function of CEOs has changed over time: they are now more often poached from outside firms than before (Murphy and Zabojnik, 2004;Frydman, 2005); shareholders have become more convinced of the importance of financial incentives (Jensen et al., 2004). By contrast, Gabaix and Landier (2008, henceforth GL) argue that the bulk of variations in CEO compensation across time and across companies can be explained as the result of competitive market forces. They show that under fairly general assumptions, in a market,

Capital in the Twenty-First Century: A Critique of Thomas Piketty’s Political Economy

“…Link with performance: there actually is a close connection between firm performance and salaries, contrary to Piketty's argument. The results in Gabaix, Landier and Sauvagnat (2014) support this. In addition, Kaplan (2013) argues that poor-performing CEOs are much more likely to lose their jobs, with the increased pay likely to reflect the increased risk faced by CEOs.…”

“…More substantial CEO wage growth in the US could be because the most productive technologies have been implemented more in the US than elsewhere and the highest paid professionals may have relocated to the US (Kaplan and Rauh 2013). In addition, Gabaix, Landier and Sauvagnat (2014) update the 2008 study and show that CEO pay fairly closely followed firm size downwards during the GFC and upwards since then.…”

Executive Compensation: A Survey of Theory and Evidence

“…This elasticity is robust to the inclusion of industry, year, and industry-year …xed e¤ects. A positive relationship between …rm size and CEO pay has been documented by, among others, Roberts (1956), Murphy (1985), Baker, Jensen, and Murphy (1988), Barro and Barro (1990), Murphy (1999), Gabaix and Landier (2008), Frydman and Saks (2010), and Gabaix, Landier, and Sauvagnat (2014). Section 3.1 relates the observed CEO pay-size elasticity to the predictions of CEO-…rm assignment models, and Section 3.3 to the predictions of assignment models with moral hazard.…”

“…29 The empirical literature focuses on CEOs'percentage equity ownership, not their percentage ownership of total …rm value (equity plus debt). Gabaix, Landier, and Sauvagnat (2014) discuss which measure of …rm scale is appropriate under di¤erent assumptions about the CEO's production function. 30 For simplicity, we assume that initial …rm size S is net of the expected wage w.…”

Efficient markets, managerial power, and CEO compensation

“…The six-fold increase in CEO pay at large US companies from 1980 to 2003 matches the six-fold increase in the market capitalization of the companies during the period [8]. Subsequently, average total firm values fell by 17% during the crisis of 2007-2008 and rebounded by 19% in 2009-2011, while CEO compensation fell by 28% and then rebounded by 22% [9]. These coordinated movements between firm values and pay help to substantiate the notion that CEO pay is competitively determined and that pay levels reflect the value of talent magnified through the scale of the firm.…”