Why Has CEO Pay Increased So Much?

Xavier Gabaix () and Augustin Landier

No 12365, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper develops a simple equilibrium model of CEO pay. CEOs have different talents and are matched to firms in a competitive assignment model. In market equilibrium, a CEO%u2019s pay changes one for one with aggregate firm size, while changing much less with the size of his own firm. The model determines the level of CEO pay across firms and over time, offering a benchmark for calibratable corporate finance. The sixfold increase of CEO pay between 1980 and 2003 can be fully attributed to the six-fold increase in market capitalization of large US companies during that period. We find a very small dispersion in CEO talent, which nonetheless justifies large pay differences. The data broadly support the model. The size of large firms explains many of the patterns in CEO pay, across firms, over time, and between countries.

JEL-codes: D2 D3 G34 J3 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-bec and nep-fin
Date: 2006-07
Note: AP EFG LS
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Working Paper: Why Has CEO Pay Increased So Much? (2006)
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