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Earnings Distribution, Corporate Governance and CEO Pay

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  • Frederick Guy

Abstract

We investigate the relationship between earnings differentials and the pay of CEOs of 186 British companies between 1970 and 1990. We find that (i) changes in the differential between the 90th and 50th weekly earnings percentiles for non-manual adult male workers explain changes in the level of real CEO salary and bonus in our sample of companies; (ii) changes in this differential also explain changes in the elasticity of CEO pay to firm size; (iii) broader measures of earnings inequality do a far worse job explaining changes in both the level and the firm size elasticity of CEO pay; (iv) fitting the model on data for 1970-83 and predicting pay levels for the period starting with the widespread adoption of executive share option schemes in 1984, our model essentially continues to predict CEO salary plus bonus, and fails to account for the additional compensation represented by the new share options. We conclude firstly that top executive pay prior to 1984 was a stable function of both firm size and earnings differentials lower on the administrative ladder, consistent with a hypothesis advanced by Herbert Simon in 1957; and secondly that the use of share options from 1984 onward represents not simply a change in the mode of top executive compensation, but a structural break in the relationship between the pay of top executives and that of their subordinates.

Suggested Citation

  • Frederick Guy, 1999. "Earnings Distribution, Corporate Governance and CEO Pay," Working Papers wp126, Centre for Business Research, University of Cambridge.
    • Handle: RePEc:cbr:cbrwps:wp126
    Note: PRO-2
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    File URL: https://www.jbs.cam.ac.uk/cbrwp126/
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    References listed on IDEAS

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    1. repec:bla:jfinan:v:43:y:1988:i:3:p:593-616 is not listed on IDEAS
    2. Fred Guy, 2000. "CEO Pay, Shareholder Returns and Accounting Profitability," Working Papers wp155, Centre for Business Research, University of Cambridge.
    3. Peter Gottschalk & Timothy M. Smeeding, 1997. "Cross-National Comparisons of Earnings and Income Inequality," Journal of Economic Literature, American Economic Association, vol. 35(2), pages 633-687, June.
    4. Baker, G.P. & Jensen, M.C. & Murphy, K.J., 1988. "Compensation And Incentives: Practice Vs. Theory," Papers 88-05, Rochester, Business - Managerial Economics Research Center.
    5. Yermack, David, 1997. "Good Timing: CEO Stock Option Awards and Company News Announcements," Journal of Finance, American Finance Association, vol. 52(2), pages 449-476, June.
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    7. Sherwin Rosen, 1982. "Authority, Control, and the Distribution of Earnings," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 311-323, Autumn.
    8. Rosen, S., 1990. "Contracts and Market for Executives," University of Chicago - Economics Research Center 90-12, Chicago - Economics Research Center.
    9. Main, Brian G M & Bruce, Alistair & Buck, Trevor, 1996. "Total Board Remuneration and Company Performance," Economic Journal, Royal Economic Society, vol. 106(439), pages 1627-1644, November.
    10. Murphy, Kevin J., 1997. "Executive compensation and the Modern Industrial Revolution1," International Journal of Industrial Organization, Elsevier, vol. 15(4), pages 417-425, July.
    11. Frederick Guy, 2000. "CEO Pay, Shareholder Returns, and Accounting Profits," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 7(3), pages 263-274.
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    Cited by:

    1. Basil Al-Najjar & Rong Ding & Khaled Hussainey, 2016. "Determinants and value relevance of UK CEO pay slice," International Review of Applied Economics, Taylor & Francis Journals, vol. 30(3), pages 403-421, May.
    2. Frederick Guy, 2000. "CEO Pay, Shareholder Returns, and Accounting Profits," International Journal of the Economics of Business, Taylor & Francis Journals, vol. 7(3), pages 263-274.

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    More about this item

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

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