Working Paper: NBER ID: w14145
Authors: Carola Frydman; Raven E. Saks
Abstract: We analyze the long-run trends in executive compensation using a new panel dataset of top executives in large publicly-held firms from 1936 to 2005, collected from corporate reports. This historic perspective reveals several surprising new facts that conflict with inferences based only on data from the recent decades. First, the median real value of compensation was remarkably flat from the end of World War II to the mid-1970s, even during times of rapid economic expansion and aggregate firm growth. This finding contrasts sharply with the steep upward trajectory of pay over the past thirty years, which coincided with a period of similarly large increases in aggregate firm size. A second surprising finding is that the sensitivity of an executive's wealth to firm performance was not inconsequentially small for most of our sample period. Thus, recent years were not the first time when compensation arrangements served to align managerial incentives with those of shareholders. Taken together, the long-run trends in the level and structure of compensation pose a challenge to several common explanations for the widely-debated surge in executive pay of the past several decades, including changes in firms' size, rent extraction by CEOs, and increases in managerial incentives.
Keywords: Executive Compensation; Long-Term Trends; Managerial Pay; Corporate Governance
JEL Codes: G30; J33; M52; N82
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Median real value of executive compensation was flat from the end of World War II to the mid-1970s (J31) | Executive compensation dynamics changed (M12) |
| Steep increase in pay over the last three decades (J31) | Structural change in compensation dynamics (J33) |
| Sensitivity of executive wealth to firm performance was significant throughout most of the sample period (L25) | Managerial incentives aligned with shareholder interests (G34) |
| Run-up in CEO pay cannot be solely attributed to managerial rent-seeking (M12) | Pay levels and stock option use were lower in earlier decades (J33) |
| Correlation between executive pay and firm size was substantially weaker prior to the mid-1970s (L25) | Larger firms do not always pay more (L25) |
| Relationship between compensation and firm performance has strengthened over time (L25) | Rise of stock options (M52) |
| Determinants of executive pay have evolved (M12) | Need for further investigation into long-run trends (E32) |