The sixfold rise in pay for America’s top executives over the past quarter-century has brought an outcry from populists. But economists Xavier Gabaix and Augustin Landier of New York University argue that CEO pay merely rose in lockstep with the market value of large corporations during this period. The average value of the nation’s top thousand firms grew by more than 500 percent from 1980 to 2003. Average chief executive pay went up by the same relative amount.
Gabaix and Landier say that the difference in top talent is almost minuscule. The best CEO is statistically likely to increase earnings by .016 percent more than the 250th-best CEO. Even so, when that figure is applied to a $500 billion company, it amounts to an extra $80 million, hardly chump change. The astonishing pay raises for chief executives can turn out to be cost-effective.
Executive salaries have not risen at the same astronomical rate in other countries, the authors say, in part because foreign firms have not increased in value at the same rate as those in the United States. But in at least one other country, Japan, where the rate of market capitalization has soared, executive pay has not kept pace. Comparing giant companies in the two countries, Gabaix and Landier found that the average compensation of Japanese CEOs was only one-third that of their American counterparts. Tokyo corporations, they say, are much more likely to groom their executives internally than to bid for CEO talent on the open market.
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The Source: "Why Has CEO Pay Increased So Much?" by Xavier Gabaix and Augustin Landier, in The Quarterly Journal of Economics, February 2008.
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