Paper Abstract
510. Lucian Bebchuk & Yaniv Grinstein, The Growth of Executive Pay, 04/2005; subsequently published in Oxford Review of Economic Policy, Vol. 21, No. 2, 2005, 283-303.
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 has added up to about $290 billion, and the ratio of
the aggregate top-five compensation paid by public firms to the aggregate earnings of these
firms increased from 4.8% in 1993-1995 to 10.3% 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.