EXECUTIVE PAY AND FIRM SIZE: American CEOs” compensation has continued to track their companies” market values during and after the crisis

Executive compensation at the top US-based firms closely tracked the evolution of firm market values over the period 2004-2011. That is the central finding of a study by Xavier Gabaix, Augustin Landier and Julien Sauvagnat, published in the February 2014 issue of the Economic Journal.

Their research examines whether the ”size of stakes” view of CEO pay that two of the authors first formalised just prior to the crisis (Gabaix and Landier, ”Why has CEO Pay Increased So Much?”, Quarterly Journal of Economics, 2008) passes the test of time. In the earlier study, CEO pay reflects the size of firms affected by talent in a competitive market.

This theory of managerial pay is referred to as the ”size of stakes” view because it implies that if all firm sizes rise (or decline) over time by a factor x, compensation should rise (or decline) by that same factor. The earlier study provides evidence consistent with that view, showing that CEO pay and firm size increased by the same factor over the period 1970-2003.


The period 2004-2011 offers an opportunity to examine the theory further as firm size, as measured by total market value, was strongly negatively affected during the Great Recession (2007-2009) and then rebounded. The authors find proportional changes in executive compensation and firm size as the markets fell and rebounded:


· In the period 2007-2009, firm value decreased by 17% and CEO pay by 28%.


· In the period 2009-2011, firm value increased by 19% and CEO pay by 22%.


The authors also investigate whether the size of stakes view can be used to describe the market for non-CEO executives. It turns out that non-CEO pay, measured by the compensation of the four highest-paid non-CEO executives in the top US-based firms has followed an evolution very similar to that of CEO pay:


· Between 1992 and 2011, non-CEO increased by a factor of 2.5 while CEO pay (and firm total market value) increased by a factor of 3 (see Figure below).

”CEO Pay and Firm Size: An Update After the Crisis” by Xavier Gabaix, Augustin Landier and Julien Sauvagnat is published in the February 2014 issue of the Economic Journal. Xavier Gabaix is at New York University. Augustin Landier and Julien Sauvagnat are at the Toulouse School of Economics. The earlier study ”Why has CEO Pay Increased So Much?” by Xavier Gabaix and Augustin Landier was published in 2008 in the Quarterly Journal of Economics 123(1): 49-100.

Xavier Gabaix


Augustin Landier


Julien Sauvagnat