CEO compensation: the latest results

Here’s the latest:

We analyze the long-run trends in executive compensation using a new panel dataset of top executives in large publicly-held firms from 1936 to 2005, collected from corporate reports. This historic perspective reveals several surprising new facts that conflict with inferences based only on data from the recent decades. First, the median real value of compensation was remarkably flat from the end of World War II to the mid-1970s, even during times of rapid economic expansion and aggregate firm growth. This finding contrasts sharply with the steep upward trajectory of pay over the past thirty years, which coincided with a period of similarly large increases in aggregate firm size. A second surprising finding is that the sensitivity of an executive’s wealth to firm performance was not inconsequentially small for most of our sample period. Thus, recent years were not the first time when compensation arrangements served to align managerial incentives with those of shareholders. Taken together, the long-run trends in the level and structure of compensation pose a challenge to several common explanations for the widely-debated surge in executive pay of the past several decades, including changes in firms’ size, rent extraction by CEOs, and increases in managerial incentives.

I don’t quite think these results are "surprising" any more, though they would have been three years ago.  In my view the analytically noxious "cultural factors" are looming larger in the explanation than we used to think.  It’s become increasingly hard to deny top producers what they, in economic terms, are worth.


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