We have seen a growth in executive pay in the last decade of the 90's.
Abstract: The Growth of Executive Pay
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 has added up to about
$290 billion, and the ratio of the aggregate top-five compensation paid
by public firms to the aggregate earnings of these firms increased from
4.8% in 1993-1995 to 10.3% 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.
The question is are these executives worth it, but
more importantly, how does one decide?