Working Paper: NBER ID: w19078
Authors: Xavier Gabaix; Augustin Landier; Julien Sauvagnat
Abstract: In the "size of stakes" view quantitatively formalized in Gabaix and Landier (2008), CEO compensation is determined in a competitive talent market, and reflects the size of firms affected by talent. This paper offers an empirical update on this view. The years 2004-2011, which include the recent crisis, were not part of the initial study and offer a laboratory to examine the theory as they include new positive and negative shocks to the size of large firms. Executive compensation at the top (ex ante) did closely track the evolution of average firm value during those years. During the crisis (2007 - 2009), average total firm value decreased by 17%, and CEO pay decreased by 28%. During 2009-2011, we observe a rebound of firm value by 19% and of CEO pay increased by 22%. These fairly proportional changes provide a validity check in favor of the "size of stakes" view.
Keywords: CEO Compensation; Firm Size; Executive Pay
JEL Codes: G3; J2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| firm size decreases (L25) | CEO compensation decreases (M12) |
| firm size increases (L25) | CEO compensation increases (M12) |
| changes in firm value (G32) | CEO compensation (M12) |