Why Has CEO Pay Increased So Much?
Source: National Bureau of Economic Research
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's 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 six fold 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. The authors find a very small dispersion in CEO talent, which nonetheless justifies large pay differences. The data broadly support the model.
| Format: | Size: | 482.83 | |
| Date: | Jul 2006 |
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