WHY HAS CEO PAY INCREASED SO MUCH?

[brendan]

WHY HAS CEO PAY INCREASED SO MUCH?
http://www.mitpressjournals.org/doi/pdf/10.1162/qjec.2008.123.1.49

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’s pay depends on both the size of his firm and the
aggregate firm size. The model determines the level of CEO pay across firms and
over time, offering a benchmark for calibratable corporate finance. We find a very
small dispersion in CEO talent, which nonetheless justifies large pay differences.
In recent decades at least, the size of large firms explains many of the patterns in
CEO pay, across firms, over time, and between countries. In particular, in the baseline
specification of the model’s parameters, the sixfold increase of U.S. CEO pay
between 1980 and 2003 can be fully attributed to the sixfold increase in market
capitalization of large companies during that period.