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The Growth of Executive Pay

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  • Lucian Bebchuk
  • Yaniv Grinstein

Abstract

This paper examines both empirically and theoretically the growth of U.S. executive pay during the period 1993-2003. During this period, pay has grown much beyond the increase that could be explained by changes in firm size, performance and industry classification. Had the relationship of compensation to size, performance and industry classification remained the same in 2003 as it was in 1993, mean compensation in 2003 would have been only about half of its actual size. During the 1993-2003 period, equity-based compensation has increased considerably in both new economy and old economy firms, but this growth has not been accompanied by a substitution effect, i.e., a reduction in non-equity compensation. The aggregate compensation paid by public companies to their top-five executives during the considered period added up to about $350 billion, and the ratio of this aggregate top-five compensation to the aggregate earnings of these firms increased from 5% in 1993-1995 to about 10% in 2001-2003. After presenting evidence about the growth of pay, we discuss alternative explanations for it. We examine how this growth could be explained under either the arm's length bargaining model of executive compensation or the managerial power model. Among other things, we discuss the relevance of the parallel rise in market capitalizations and in the use of equity-based compensation.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11443.

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Date of creation: Jun 2005
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Publication status: published as Bebchuk, Lucian A. and Yaniv Grinstein. “The Growth of Executive Pay.” Oxford Review of Economic Policy 21 (2005): 283-303.
Handle: RePEc:nbr:nberwo:11443

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  1. Fama, Eugene F. & French, Kenneth R., 1997. "Industry costs of equity," Journal of Financial Economics, Elsevier, Elsevier, vol. 43(2), pages 153-193, February.
  2. John E. Core & Wayne R. Guay & David F. Larcker, 2003. "Executive equity compensation and incentives: a survey," Economic Policy Review, Federal Reserve Bank of New York, Federal Reserve Bank of New York, issue Apr, pages 27-50.
  3. Brian J. Hall & Kevin J. Murphy, 2003. "The Trouble with Stock Options," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 17(3), pages 49-70, Summer.
  4. Benjamin E. Hermalin, 2005. "Trends in Corporate Governance," Journal of Finance, American Finance Association, American Finance Association, vol. 60(5), pages 2351-2384, October.
  5. Bebchuk, Lucian A. & Fried, Jesse M., 2003. "Executive Compensation as an Agency Problem," Berkeley Olin Program in Law & Economics, Working Paper Series, Berkeley Olin Program in Law & Economics qt81q3136r, Berkeley Olin Program in Law & Economics.
  6. Bebchuk, Lucian Arye & Fried, Jesse, 2003. "Executive Compensation as an Agency Problem," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3961, C.E.P.R. Discussion Papers.
  7. Kevin J. Murphy & Jan Zabojnik, 2006. "Managerial Capital and the Market for CEOs," Working Papers, Queen's University, Department of Economics 1110, Queen's University, Department of Economics.
  8. Michael C. Jensen & Kevin J. Murphy, 1990. "Ceo Incentives - It'S Not How Much You Pay, But How," Journal of Applied Corporate Finance, Morgan Stanley, Morgan Stanley, vol. 3(3), pages 36-49.
  9. Murphy, Kevin J., 1999. "Executive compensation," Handbook of Labor Economics, Elsevier, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 38, pages 2485-2563 Elsevier.
  10. Brian J. Hall & Kevin J. Murphy, 2003. "The Trouble with Stock Options," NBER Working Papers 9784, National Bureau of Economic Research, Inc.
  11. Richard M. Cyert & Sok-Hyon Kang & Praveen Kumar, 2002. "Corporate Governance, Takeovers, and Top-Management Compensation: Theory and Evidence," Management Science, INFORMS, INFORMS, vol. 48(4), pages 453-469, April.
  12. Lucian A. Bebchuk & Robert J. Jackson, Jr., 2005. "Executive Pensions," NBER Working Papers 11907, National Bureau of Economic Research, Inc.
  13. Core, John E. & Holthausen, Robert W. & Larcker, David F., 1999. "Corporate governance, chief executive officer compensation, and firm performance," Journal of Financial Economics, Elsevier, Elsevier, vol. 51(3), pages 371-406, March.
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