Worth Every Penny

Worth Every Penny

Chief executive pay went up by more than 500 percent, on average, from 1980 to 2003, but so did the value of the top 1,000 firms.

Read Time:
1m 22sec

The source: “Why Has CEO Pay Increased So Much?” by Xavier Gabaix and Augustin Landier, in The Quarterly Journal of Economics, Feb. ­2008.

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.

More From This Issue