Thursday, February 07, 2008

Q: Why Did CEO Pay Increase 6X From 1980-2003?

A: Simple. Because there was a 6X increase in the market capitalization of large companies during that period (see red line in graph above for market cap, vs. blue/green lines for CEO pay), according to this forthcoming QJE article by NYU business professors Xavier Gabaix and Augustin Landier.

HT:
Kevin "Angus" Grier at KPC

11 Comments:

At 2/07/2008 1:13 PM, Blogger ProbTrader said...

Was there a 6X increase in media salaries over the same period? :)

 
At 2/07/2008 2:02 PM, Anonymous Fred said...

I worked for a company that hired vice presidents and other pointy hairs in good times and laid off engineers in bad times.

The ratio of well paid management to engineers got to be 1:1 juat before collapse.

Were these managers worth their pay? They assured each other they were.

 
At 2/07/2008 2:41 PM, Anonymous Is said...

And the company collapsed... Good, the market did its job. What does that have to do with the graphic?

 
At 2/07/2008 3:52 PM, Blogger spencer said...

What economic benefit do we derive from the CEOs collecting the economic rent from the Fed bring down inflation and interest rates over this era -- the dominant reason the market increased six fold.

 
At 2/07/2008 5:36 PM, Blogger Walt G. said...

I don't mind paying a CEO six times as much if my stock is worth six times as much. In fact, that is the pay-for-performance I expect.

 
At 2/07/2008 6:25 PM, Anonymous marmico said...

Spencer put it simply and eloquently. Let's see if I can bring more meat to the table.

The price-earnings (PE) ratio more than doubled in the time period (a some what outdated chart to illustrate the point) and net profit margins (and profits as a percentage of GDP) are at historical highs.

Now one can justify compensation increases for the profits and margins but not for the great moderation driving expansion in PEs.

However, the profit margins/profits may be "fat tails" or fake alpha in which case additional CEO compensation is unwarranted.

 
At 2/07/2008 6:33 PM, Blogger bobble said...

LOL, they must have left (ex Home depot CEO) Bob Nardelli out of those calculations. $210 million for LOWERING market cap!

 
At 2/07/2008 7:11 PM, Blogger happyjuggler0 said...

People like to complain about CEO pay, and I can understand that. But "Private Equity" (aka LBO funds) is paying them even more than they make in publicly traded companies for the most part.

As far as Bob Nardelli is concerned, all I can say is that he has a juicy contract with Chrysler where the new owners are paying him big if he delivers. Someone who is putting their own money (and OPM) on the line is betting he isn't a loser despite Home Depot.

spencer, I think it has to do with limited supply of "proven" (at least perceived to be proven) talent in the CEO suite compared to high demand from risk averse board members.

If there was a higher supply of highly skilled CEO's out there relative to large cap companies, then their cut of the pie would get bid way down.

 
At 2/08/2008 12:29 PM, Blogger bobble said...

happy: "As far as Bob Nardelli is concerned, all I can say is that he has a juicy contract with Chrysler where the new owners are paying him big if he delivers. Someone who is putting their own money (and OPM) on the line is betting he isn't a loser despite Home Depot."

i notice they were smart enuf to pay him nothing up front. i think he's working for $1/year or some such thing. apparently his bargaining power has been justifiably reduced! market forces sometimes work.

 
At 2/27/2008 7:04 PM, Blogger Randall Iverson said...

If the data is normalized to "1" in 1980, why do none of the lines begin at "1"? I am a fervent free marketeer, but we can't win arguments with dishonesty.

 
At 2/27/2008 7:20 PM, Blogger Randall Iverson said...

My Bad. I just realized that the chart starts in 1970, vs 1980, when all lines are at 1. But, that still leaves the question of why did exec compensation proportionately quadruple in the 1970's.

 

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