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CESifo Economic Studies Advance Access originally published online on August 25, 2009
CESifo Economic Studies 2009 55(3-4):458-481; doi:10.1093/cesifo/ifp021
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© The Author 2009. Published by Oxford University Press on behalf of Ifo Institute for Economic Research, Munich. All rights reserved. For permissions, please email: journals.permissions@oxfordjournals.org

Learning from the Past: Trends in Executive Compensation over the 20th Century

Carola Frydman*

* MIT Sloan School of Management, 50 Memorial Drive Room E52–436, Cambridge MA, 02142, USA, e-mail: frydman{at}mit.edu. I thank the participants at the CESifo Venice Summer Institute Workshop on "Executive Pay" held on July 16–17 2008 for their comments.

In recent years, a large academic debate has tried to explain the rapid rise in CEO pay experienced over the past three decades. In this article, I review the main proposed theories, which span views of compensation as the result of a competitive labor market for executives to theories based on excess of managerial power. Some of these hypotheses have found support in cross-sectional evidence, but it has proven more difficult to determine which factors have caused the observed changes in pay over time. An alternative strategy is to evaluate the fit of plausible explanations out of sample by contrasting them with the evolution in executive pay and the market for managers during earlier time periods. A case study of General Electric suggests that evidence for earlier decades can speak of the recent trends and reveals the limitations of current explanations to address the long-run data. (JEL codes: G30, J33, M52, N82)

Key Words: Executive compensation • managerial incentives • corporate governance • market for managers


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