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Earnings Distribution, Corporate Governance and CEO Pay

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Author Info
Frederick Guy
Abstract

We investigate the relationship between earnings differentials and the pay of CEOs of 186 British companies between 1970 and 1990. We find that (i) changes in the differential between the 90th and 50th weekly earnings percentiles for non-manual adult male workers explain changes in the level of real CEO salary and bonus in our sample of companies; (ii) changes in this differential also explain changes in the elasticity of CEO pay to firm size; (iii) broader measures of earnings inequality do a far worse job explaining changes in both the level and the firm size elasticity of CEO pay; (iv) fitting the model on data for 1970-83 and predicting pay levels for the period starting with the widespread adoption of executive share option schemes in 1984, our model essentially continues to predict CEO salary plus bonus, and fails to account for the additional compensation represented by the new share options. We conclude firstly that top executive pay prior to 1984 was a stable function of both firm size and earnings differentials lower on the administrative ladder, consistent with a hypothesis advanced by Herbert Simon in 1957; and secondly that the use of share options from 1984 onward represents not simply a change in the mode of top executive compensation, but a structural break in the relationship between the pay of top executives and that of their subordinates.

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Paper provided by ESRC Centre for Business Research in its series ESRC Centre for Business Research - Working Papers with number wp126.

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Date of creation: Jun 1999
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Handle: RePEc:cbr:cbrwps:wp126

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Find related papers by JEL classification:
D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Sherwin Rosen, 1990. "Contracts and the Market for Executives," NBER Working Papers 3542, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Yermack, David, 1997. " Good Timing: CEO Stock Option Awards and Company News Announcements," Journal of Finance, American Finance Association, vol. 52(2), pages 449-76, June. [Downloadable!] (restricted)
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  3. Baker, George P & Jensen, Michael C & Murphy, Kevin J, 1988. " Compensation and Incentives: Practice vs. Theory," Journal of Finance, American Finance Association, vol. 43(3), pages 593-616, July. [Downloadable!] (restricted)
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  4. Cosh, Andrew, 1975. "The Remuneration of Chief Executives in the United Kingdom," Economic Journal, Royal Economic Society, vol. 85(337), pages 75-94, March. [Downloadable!] (restricted)
  5. Peter Gottschalk & Timothy M. Smeeding, 1997. "Cross-National Comparisons of Earnings and Income Inequality," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 633-687, June. [Downloadable!] (restricted)
  6. Main, Brian G M & Bruce, Alistair & Buck, Trevor, 1996. "Total Board Remuneration and Company Performance," Economic Journal, Royal Economic Society, vol. 106(439), pages 1627-44, November. [Downloadable!] (restricted)
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  1. Frederick Guy, 2000. "CEO Pay, Shareholder Returns, and Accounting Profits," International Journal of the Economics of Business, Taylor and Francis Journals, vol. 7(3), pages 263-274, November. [Downloadable!] (restricted)
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