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.


Surely, the pay earned by Wall Street and bank CEOs over the past five years, if nothing else, should make you pause before saying that people at the top are being "paid what they, in econmic terms, are worth." If you want to say, "what board members fantasize they are worth" you might be closer to the truth. And an important part of those fantasies is a radical overestimation of the value of the individual CEO. That's one of the real cultural factors operating here.

"top producers are paid what they, in economic terms, are worth": When did you discover the independent measure of worth and mind telling us what it is?
Unless you have adopted a new theory of value,, that sentence means that people at the top 'are paid what they are paid.' Or is it that "top producers" has some special meaning?

I wonder how much of "it's become increasingly hard to deny top producers what they, in economic terms, are worth" is concentrated in the financial services industry.

I think it may be particularly true in my business of hedge funds. There are the same number of bright, market-beating investors as there were 40 years ago, but 40 years ago they all had to work for a large Wall Street firm. Today it's much easier for them to work for themselves, and reap more of the benefits of their outperformance.

I blogged about this here:

Let's compare the CEO's salary to top division level managers within the company. I suspect those ratios to be high. CEOs are paid what they are paid because they have successfully taken over the company and as long as they are able to fend of an external takeover they can extract what they want. Really more akin to a hostage situation.

I wonder if Nadav Manham's hypothesis applies to the "worth what they are paid" argument. The world population has drastically increased over the last 80 years. We expect the number of "smart" people to increase proportionately to the world population, but what if Nadav's hypothesis is right? The number of smart people may still have increased, but the number of people who are successful at being CEOs has stayed the same. Then you would have to conclude that the average pay for CEOs is too high, and the pay for the "best" is way too low.

Its just too hard to determine which CEOs are successfull because one CEO may just have good luck when it comes to moving companies before his bad leadership takes the company down. Therefore, all CEOs are worth as much as the company can afford, to try to ensure they are getting one of the "best". What is this theory called again?

*Are* managerial incentives, in fact, aligned with those of shareholders? Or do CEOs simply gut long-term productive capability (especially human capital) in order to inflate short-term share prices (and thus game their own bonuses)?

When I think of "top producers" like Bob Nardelli, "Chainsaw Al" Dunlap, and Carly Fiorina, who systematically hollow out enterprises and then collect multi-million bonuses before they move on, I have to laugh.

Nice to know you're into faith-based economics.


Fair enough. So how then do you explain the fact that the
US economy did better during the 1945-mid-1970s period than
since while CEO salaries were basically constant during the
first period and have been soaring ever since?


The problem is with how "performance" itself is defined. The metric of "performance" by which compensation is determined, itself, promotes perverse behavior. "Performance" is generally defined as short-term profit, at the expense of long-term hollowing-out of productive capability. The corporate planned economy is driven to irrationality by its metrics in exactly the same way as the old state socialist planned economy in the USSR.

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