IDEAS home Printed from https://ideas.repec.org/p/cbr/cbrwps/wp126.html
   My bibliography  Save this paper

Earnings Distribution, Corporate Governance and CEO Pay

Author

Listed:
  • 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.

Suggested Citation

  • Frederick Guy, 1999. "Earnings Distribution, Corporate Governance and CEO Pay," Working Papers wp126, Centre for Business Research, University of Cambridge.
    • Handle: RePEc:cbr:cbrwps:wp126
    Note: PRO-2
    as

    Download full text from publisher

    File URL: https://www.jbs.cam.ac.uk/cbrwp126/
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Rosen, S., 1990. "Contracts and Market for Executives," University of Chicago - Economics Research Center 90-12, Chicago - Economics Research Center.
    2. Yermack, David, 1997. "Good Timing: CEO Stock Option Awards and Company News Announcements," Journal of Finance, American Finance Association, vol. 52(2), pages 449-476, June.
    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.
    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.
    5. Main, Brian G M & Bruce, Alistair & Buck, Trevor, 1996. "Total Board Remuneration and Company Performance," Economic Journal, Royal Economic Society, vol. 106(439), pages 1627-1644, November.
    6. Frederick Guy, 2000. "CEO Pay, Shareholder Returns, and Accounting Profits," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 7(3), pages 263-274.
    7. Fred Guy, 2000. "CEO Pay, Shareholder Returns and Accounting Profitability," Working Papers wp155, Centre for Business Research, University of Cambridge.
    8. Sherwin Rosen, 1982. "Authority, Control, and the Distribution of Earnings," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 311-323, Autumn.
    9. Murphy, Kevin J., 1997. "Executive compensation and the Modern Industrial Revolution1," International Journal of Industrial Organization, Elsevier, vol. 15(4), pages 417-425, July.
    10. 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.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Frederick Guy, 2000. "CEO Pay, Shareholder Returns, and Accounting Profits," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 7(3), pages 263-274.
    2. Basil Al-Najjar & Rong Ding & Khaled Hussainey, 2016. "Determinants and value relevance of UK CEO pay slice," International Review of Applied Economics, Taylor & Francis Journals, vol. 30(3), pages 403-421, May.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Frederick Guy, 2000. "CEO Pay, Shareholder Returns, and Accounting Profits," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 7(3), pages 263-274.
    2. Fred Guy, 2000. "CEO Pay, Shareholder Returns and Accounting Profitability," Working Papers wp155, Centre for Business Research, University of Cambridge.
    3. repec:eee:labchp:v:3:y:1999:i:pb:p:2485-2563 is not listed on IDEAS
    4. Burks, Stephen V & Guy, Frederick & Maxwell, Benjamin, 2004. "7. Shifting Gears In The Corner Office: Deregulation And The Earnings Of Trucking Executives," Research in Transportation Economics, Elsevier, vol. 10(1), pages 137-164, January.
    5. Mäkinen, Mikko, . "Essays on Stock Option Schemes and CEO Compensation," ETLA A, The Research Institute of the Finnish Economy, number 42.
    6. Xavier Gabaix & Augustin Landier, 2008. "Why has CEO Pay Increased So Much?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 123(1), pages 49-100.
    7. Kenneth W. Clements & H. Y. Izan, 2008. "The Stairway to the Top: The Remuneration of Academic Executives," Australian Journal of Management, Australian School of Business, vol. 33(1), pages 1-30, June.
    8. Paul Gregg & Sarah Jewell & Ian Tonks, 2005. "Executive Pay and Performance in the UK 1994-2002," The Centre for Market and Public Organisation 05/122, The Centre for Market and Public Organisation, University of Bristol, UK.
    9. Uygur, Ozge, 2019. "Income inequality in S&P 500 companies," The Quarterly Review of Economics and Finance, Elsevier, vol. 72(C), pages 52-64.
    10. Wright, Peter & Thompson, Steve & Girma, Sourafel, 2002. "Merger Activity and Executive Pay," CEPR Discussion Papers 3255, C.E.P.R. Discussion Papers.
    11. Mónica Melle, 2005. "¿Cómo valora el mercado de valores español la adopción de planes de opciones sobre acciones para directivos y consejeros?," Investigaciones Economicas, Fundación SEPI, vol. 29(1), pages 73-115, January.
    12. Michael Waldman, 1990. "A Signalling Explanation for Seniority Based Promotions and Other Labor Market Puzzles," UCLA Economics Working Papers 599, UCLA Department of Economics.
    13. Dato, Simon & Grunewald, Andreas & Kräkel, Matthias & Müller, Daniel, 2016. "Asymmetric employer information, promotions, and the wage policy of firms," Games and Economic Behavior, Elsevier, vol. 100(C), pages 273-300.
    14. Lucian Arye Bebchuk & Jesse M. Fried, 2003. "Executive Compensation as an Agency Problem," Journal of Economic Perspectives, American Economic Association, vol. 17(3), pages 71-92, Summer.
    15. Bouwens, J.F.M.G. & van Lent, L.A.G.M., 2003. "Effort and Selection Effects of Incentive Contracts," Discussion Paper 2003-130, Tilburg University, Center for Economic Research.
    16. Raaj Kumar Sah, 1991. "Fallibility in Human Organizations and Political Systems," Journal of Economic Perspectives, American Economic Association, vol. 5(2), pages 67-88, Spring.
    17. Chen, Chao-Jung & Hsu, Chung-Yuan & Chen, Yu-Lin, 2014. "The impact of family control on the top management compensation mix and incentive orientation," International Review of Economics & Finance, Elsevier, vol. 32(C), pages 29-46.
    18. Gaumont, D. & Merlateau, M.P., 1993. "Manager's Incentives and Individual Wealth," Working Paper Series 379, Research Institute of Industrial Economics.
    19. repec:eee:labchp:v:3:y:1999:i:pb:p:2373-2437 is not listed on IDEAS
    20. Agyei-Boapeah, Henry & Ntim, Collins G. & Fosu, Samuel, 2019. "Governance structures and the compensation of powerful corporate leaders in financial firms during M&As," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 37(C).
    21. Garner, Jacqueline L. & Kim, Won Yong, 2013. "Are foreign investors really beneficial? Evidence from South Korea," Pacific-Basin Finance Journal, Elsevier, vol. 25(C), pages 62-84.
    22. Michelle Haynes & Steve Thompson & Mike Wright, 2007. "Executive Remuneration and Corporate Divestment: Motivating Managers to Make Unpalatable Decisions," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(5‐6), pages 792-818, June.

    More about this item

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cbr:cbrwps:wp126. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Ruth Newman (email available below). General contact details of provider: http://www.jbs.cam.ac.uk .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.