One contrarian study comes from a pair of French academics in America. Xavier Gabaix of MIT and Augustin Landier of New York University say that since 1980 the pay of CEOs has risen in lock step with the market capitalization of their companies: both are up 500 percent. Using this logic, CEOs like Chevron’s David O’Reilly (who collected some $25 million in 2005) aren’t overpaid, because they are running ever bigger, riskier firms, making decisions that touch more and more people. No new rule can change this basic market force, the authors argue. Gabaix compares CEOs to actors and sports stars–“If you have the talent to be among the best 500 in your field, you’ll be rewarded accordingly.”
Their findings also challenge the idea that America is the epicenter of pay excess. Executive pay is higher in the United States than in Europe because U.S. companies are much larger, in terms of market cap, on average. However, many of the Japanese firms studied were as big as American firms, but paid their executives considerably less–suggesting that cultural mores still do play some role in explaining pay differences.
In Europe, some research suggests that executive pay is not outpacing performance. Deloitte & Touche recently analyzed the FTSE 350, an index of top European firms, and found that the proportion of executive pay linked directly to performance has been increasing over the past three years. Incentives now account for about half of total pay, up from a third, and companies are using increasingly sophisticated measures of performance, which used to be judged on crude measures like share price (which can be wildly misleading, depending on how cyclical a business is). “The bottom line is that to be more effective, pay structures are going to have to become more industry- and even company-specific,” says Deloitte’s Andrew Page. “You can’t just look at share price and make a smart judgment.” Nor can you assume one excessive CEO payout tars them all–no matter how much we love to resent them for it.
