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Earnings Distribution, Corporate Governance and CEO Pay

Frederick Guy ()

Working Papers from Centre for Business Research, University of Cambridge

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.

JEL-codes: D31 J31 (search for similar items in EconPapers)
Date: 1999-06
Note: PRO-2
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