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Saturday, November 11, 2006
From the WSJ's ProfessorJournal.com:
This week's Capital column reports on a new research paper by economists Xavier Gabaix, Princeton University, and Augustin Landier, New York University, that investigates why real CEO compensation is six times as much as it was in 1980. The reason why CEO pay has increased: the market. The size of firms determines the demand for CEO talent, and over the past 25 years, as measured by stock-market capitalization, companies grew sixfold. Prof. Landier states, "If all companies increase in size, the amount people are willing to pay for the same talent goes up." With larger companies, an improvement in the quality of a CEO has a greater effect on firm profit. The column offers evidence that small differences in CEO quality, for large companies, could lead to large differences in profitability. With an increase in demand for CEO talent and an inelastic supply, CEO salaries have increased.
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