Thursday, June 08, 2006

Why has CEO pay Increased so much?

Gabaix and Landier ask “Why CEO pay has increased so much?”.
Their answer: firms have gotten much larger.

Slightly longer version: Has CEO pay increased because of friendly boards? Super star status of CEOs?, or timing of option grants? Or is there an economically justified explanation. The answer is sure to surprise many who read only mainstream publications! In the authors’ own words (in the abstract):

The marginal impact of a CEO's talent is assumed to increase with the value of the assets under his control….The model predicts the cross-sectional Cobb-Douglas relation between pay and firm size. It also predicts that the level of CEO compensation should increase one for one with the average market capitalization of large firms in the economy. Therefore, the five-fold increase of CEO pay between 1980 and 2000 can be fully attributed to the increase in market capitalization of large US companies.”

While the authors admit that the paper is "Preliminary and Incomplete" it is also interesting and informative so I will mention it prior to its finished version.


Gabaix, Xavier and Landier, Augustin, "Why Has CEO Pay Increased So Much?" (March 14, 2006). MIT Department of Economics Working Paper No. 06-13 Available at SSRN:

BTW I think I saw this earlier on FinancialRounds, but when I went back to find it, I could not, so ???

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