May 18, 2006
A new study by Gabaix & Landier, discussed in today's New York Times article by Tyler Cowen, comes to the shocking discovering the CEOs are paid more if their firms are larger. An increase in firm capitalization is correlated with an increase in CEO pay. Duh; this is the age old motivation for empire building. A larger firm pays more so make your firm larger (even if not justified by gains in efficiency). Moreover, it is not much of an economic justification for high pay. Salary of line workers does not depend on capitalization of the firm for which they work; it depends on replaceablility of the worker -- the market for labor. Are CEOs replaceable? If so, the labor market should be more competitive and salaries should reflect the competition. The study notes that replacing one CEO with another in the top 250 CEOs does not make much of a difference in firm value.
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