CEO Compensation

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"The definition of 'overpaid' is 'someone else who is paid more than I think they should be,'" a friend once told us. And, indeed, despite numerous journalistic forrays into the realm of CEO compensation, no-one has ever been able to discover a specimen of the human beast who believes that his own compensation counts as 'overcompensation.'
Now the Becker-Posner blog is taking up the question of why America CEO's are paid so much. CEO compensation in the U.S. has grown six fold over the last quarter century, and CEO's of U.S. companies make close to twice as much as their counterparts elsewhere. Becker points out that the growth of CEO pay is proportionate to the growth of the companies they manage.

...the average size of large American companies has grown in real terms about six fold during the past twenty-five years, regardless of how "large" is measured, as long as the same measure is used consistently over time. The other important fact is that the largest 50, 100, or 500 American publicly traded companies are much bigger than the largest companies in other countries.


Becker provides this explanation for the relationship between the size of US companies and CEO paypackages.

...bigger companies have to pay their CEOS better in order to discourage them from going to head smaller companies. It is also socially efficient to have the best mangers run the largest companies because their greater skills then have a bigger influence since they would manage a larger amount of labor and capital.

So everything is honky-dory, right? Not quite. Leave it to Posner to spoil the party by pointing out that CEO's may be increasing the size of their companies to mask their outsized pay-packages despite failing to provide additional shareholder value.

An alternative explanation for the correlation between firm value and CEO compensation, one that is consistent with the evidence that such compensation is often excessive from an efficiency standpoint, is that the greater the firm's market value, the easier it is to "hide" the compensation of the top executives. Suppose that a 10 percent increase in value is associated with a 3 percent increase in CEO compensation; then the percentage of the firm's value that is going to the CEO will have fallen. This may be one reason why many mergers fail to increase earnings per share, although the overall value of the enterprise will be greater after the merger (there will be more shares): the increase in overall value enables the CEO to increase his compensation regardless of whether he will be creating greater value as the manager of the larger enterprise.

In short, CEOs can use acquisitions to grow their company, and thus their compensation, without providing any additional value to the shareholders.
Are CEOs Overpaid--Becker[Becker-Posner Blog]
Are CEOs Overpaid?--Posner [Becker-Posner Blog]

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