Events

Authors:

• Fei Ding
  The Hong Kong University of Science and Technology

• Sudipto Dasgupta
  The Hong Kong University of Science and Technology

Recent literature (Frydman 2005, Frydman and Saks 2005, Murphy and Zabojnik 2007) has noted that the rising trend in CEO pay since the 1970s has been accompanied by several other trends – e.g. an increase in the pay gap between CEO and non-CEO executives, more outside hires and a more active labor market, and changes in the pay distribution. The prevailing explanations that link these developments emphasize the rise in the importance of "general" as opposed to "firm-specific" skills and consequent increase in outside opportunities of the CEO. We propose a new explanation – an enhanced role of executive search intermediaries since the 1970s, fueled in the last two decades especially by improvements in search technology. A unique prediction of our model is that the above trends will also be associated with a flattening of the pay distribution towards the high-wage spectrum. We empirically document that CEO pay distribution has indeed flattened over time considerably with more mass shifting to the right-tail, which is not explained by changes in the firm size distribution.