DP9498 CEO Pay and Firm Size: an Update after the Crisis

Author(s): Xavier Gabaix, Augustin Landier, Julien Sauvagnat
Publication Date: June 2013
Keyword(s): assignment models, economics of superstars, Executive pay, inequality, matching.
JEL(s): G34, J24, J3
Programme Areas: Labour Economics, Financial Economics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=9498

In the "size of stakes" view quantitatively formalized in Gabaix and Landier (2008), CEO compensation is determined in a competitive talent market, and re flects the size of firms affected by talent. This paper offers empirical update on this view. The years 2004-2011, which include the recent crisis, were not part of the initial study and o er 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 rm 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.