Jeff Lipshaw over at Legal Profession Blog has some interesting comments on Lucian Bebchuk’s new paper Pay Distribution in the Top Executive Team. In the paper, Bebchuk and two other scholars examine CEO pay as a fraction of the other top five executives in a company and find that, over the past decade, such pay has increased relative to other executives. The paper also finds that high “CPS” or CEO Pay Slice (i.e. the percentage of the CEO’s compensation relative to the total pool of other executives) is associated with lower firm value as measured by Tobin’s Q. As Jeff notes (after a quick and dirty explanation of Tobin’s Q), Bebchuk looks at the executive compensation question from a different angle, providing a new perspective regarding why increased CEO pay may be problematic. Indeed, instead of wondering about the impact of increased CEO compensation as compared to rank-and-file salaries, Bebchuk’s study raises the possibility that when CEOs get paid more than their fellow executives it has a relationship to the company’s ability to effectively exploit its assets. For example, perhaps the fact that CEOs are able to dominate their fellow executives via compensation rates reflects something about the decision-making apparatus at the company. It is certainly not the case that a casual relationship has been established, but I agree with Jeff that it is an interesting question to ponder.
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1. Posted by Jeff Lipshaw on March 15, 2007 @ 11:04 | Permalink
Lisa, the other possibility that occurred to me just as I sat down to look at the blog was whether there was a correlation between CEO pay slice and having done a recent significant acquisition. The accepted wisdom is that acquisitions, by and large, are value-destroying as well as CEO-ego driven. What's more, the effect of booking all the goodwill reflected in the acquisition price (particularly now that there is no pooling) would ameliorate much of my concern about the use of the proxies in the version of Tobin's Q used here - which is that the researchers adjust book values to try to approximately replacement value. With a recent acquisition accounting for much of the asset value, that concern would be significantly reduced.
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