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The hidden cost of competitive executive pay

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  • Gilles Chemla

    (DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique, Imperial College London)

Abstract

Executive compensation remains one of the most contentious topics in finance. The debate is usually polarized between two views. On one side, the "shareholder view" argues that high pay is an efficient market outcome—the necessary price for scarce talent in a competitive world. On the other side, the "managerial power view" argues that high pay is the result of rent extraction by entrenched CEOs taking advantage of weak boards. In our recent paper, Too Much, Too Soon, for Too Long: The Dynamics of Competitive Executive Compensation (Journal of Finance, 2025), we propose a novel perspective. We show that even when boards are perfectly independent and markets are perfectly competitive, the equilibrium CEO compensation package is inefficient. Specifically, we find that in a competitive market, executives are paid too much, receive their pay too soon, and keep their jobs for too long relative to what is socially optimal.

Suggested Citation

  • Gilles Chemla, 2025. "The hidden cost of competitive executive pay," Post-Print halshs-05550214, HAL.
    • Handle: RePEc:hal:journl:halshs-05550214
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