TY - JOUR AU - Bebchuk,Lucian AU - Grinstein,Yaniv TI - The Growth of Executive Pay JF - National Bureau of Economic Research Working Paper Series VL - No. 11443 PY - 2005 Y2 - June 2005 UR - http://www.nber.org/papers/w11443 L1 - http://www.nber.org/papers/w11443.pdf N1 - Author contact info: Lucian A. Bebchuk Harvard Law School 1545 Massachusetts Avenue Cambridge, MA 02138 Tel: 617/495-3138 Fax: 617/812-0554 E-Mail: bebchuk@law.harvard.edu Yaniv Grinstein Johnson Graduate School of Management Cornell University 371 Sage Hall Ithaca, NY 14853 Tel: 607/255-257-6201 E-Mail: yg33@cornell.edu M2 - featured in NBER digest on 2005-06-27 AB - This paper examines both empirically and theoretically the growth of U.S. executive pay during the period 1993-2003. During this period, pay has grown much beyond the increase that could be explained by changes in firm size, performance and industry classification. Had the relationship of compensation to size, performance and industry classification remained the same in 2003 as it was in 1993, mean compensation in 2003 would have been only about half of its actual size. During the 1993-2003 period, equity-based compensation has increased considerably in both new economy and old economy firms, but this growth has not been accompanied by a substitution effect, i.e., a reduction in non-equity compensation. The aggregate compensation paid by public companies to their top-five executives during the considered period added up to about $350 billion, and the ratio of this aggregate top-five compensation to the aggregate earnings of these firms increased from 5% in 1993-1995 to about 10% in 2001-2003. After presenting evidence about the growth of pay, we discuss alternative explanations for it. We examine how this growth could be explained under either the arm's length bargaining model of executive compensation or the managerial power model. Among other things, we discuss the relevance of the parallel rise in market capitalizations and in the use of equity-based compensation. ER -