Pay Distribution in the Top Executive Team

Lucian A. Bebchuk, Martijn Cremers, Urs C. Peyer
2006 Social Science Research Network  
We investigate the distribution of pay in the top executive team in public companies. In particular, we study the CEO's pay slice (CPS), defined as the fraction of the aggregate top-five total compensation paid to the CEO. A firm's CPS might reflect the relative significance of the CEO -in terms of ability, contribution to the firm, or power -relative to other members of the top executive team. We find that CPS has been going up over the past decade, with CEOs capturing an increasing fraction
more » ... creasing fraction of both equity and non-equity based compensation. Among other things, CPS is high when the CEO has long tenure and/or chairs the board; when few other executives are members of the board; and when the firms has more entrenching provisions. High CPS is associated with lower firm value as measured by Tobin's Q. Moreover, using a simultaneous equations approach, we obtain findings suggesting that high CPS, or the factors that it reflects, bring about a lower Tobin's Q rather than the other way around. Finally, news about increases in CPS is accompanied by negative abnormal returns, especially when the firm has many provisions entrenching management. Overall, our results indicate that the distribution of compensation in the top executive team is an aspect of pay arrangements and corporate governance that is worthy of financial economists' attention.
doi:10.2139/ssrn.964303 fatcat:yetmvz7agzhmfo7zuo5grniq4u