CEO Compensation in the United States: The Pitfalls of Incentives, Luck, and Corporate Concentration

Abstract

The remuneration of Chief Executive Officers in the United States has come under fire in recent years given the vast and ever-growing disparity between CEO and average worker pay. The differential becomes even more pronounced when one considers CEO compensation in other countries. This paper examines CEO pay in the United States relative to pay in the United Kingdom. The United Kingdom not only serves as a barometer for executive compensation in the United States relative to the rest of the world, but also provides a lens to examine American compensation practices as a whole. Three key causation hypotheses for rising CEO pay in the United States emerge from the existing literature. These hypotheses include evolving compensation structure, rising corporate entrenchment and a relatively inelastic CEO labor market in the United States. This study empirically evaluates the impact of each theory on the U.S. ‘pay premium’ by regressing relevant independent variables on British and American CEO pay in 2017. In addition, this thesis presents several time-series comparisons that depict the changing level and structure of remuneration for American and British executives over a 17-year period (2000-2017). Within these longitudinal analyses, CEO pay levels across British and American stock market indices are isolated and juxtaposed to the performance of these indices. In capturing the extent of the U.S. pay premium in 2017, this study follows the empirical framework of Conyon and Murphy (1998). After controlling for firm size, industry and a number of executive characteristics, results show a profound U.S. pay premium in 2017, significantly larger than the premium found in Conyon and Murphy’s 1998 study. The results also indicate that the three popular causation hypotheses all contribute to this considerable premium.