Working Paper: NBER ID: w11443
Authors: 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.
Keywords: No keywords provided
JEL Codes: D23; G32; G38; J33; J44; K22; M14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| firm characteristics (L20) | executive pay (M12) |
| firm size and performance (L25) | compensation levels (J31) |
| unexplained growth in compensation (J33) | executive pay (M12) |
| market conditions (P42) | executive pay outcomes (M12) |
| increase in equity-based compensation (M52) | cash compensation (J33) |
| top-five compensation growth (M52) | overall firm performance metrics (L25) |