Executive Compensation: A New View from a Long-Term Perspective, 1936–2005

Abstract

We analyze the long-run trends in executive compensation using a new dataset of top officers of large firms from 1936 to 2005. The median real value of compensation was remarkably flat from the late 1940s to the 1970s, revealing a weak relationship between pay and aggregate firm growth. By contrast, this correlation was much stronger in the past thirty years. This historical perspective also suggests that compensation arrangements have often helped to align managerial incentives with those of shareholders because executive wealth was sensitive to firm performance for most of our sample. These new facts pose a challenge to several common explanations for the rise in executive pay since the 1980s. (JEL G30, J33, M52, N32) The compensation paid to CEOs of large publicly traded corporations rose dramatically during the 1980s and 1990s, stimulating much debate on the determinants of managerial pay (Murphy 1999; Hall and Murphy 2003). The discussion has been largely inconclusive, in part because readily available data only exist for the time period after 1970. By constructing a new long-run time series on executive pay, we are able to consistently document the trends in the level and structure of pay over most of the twentieth century. This historical perspective reveals several new facts that contrast sharply with data from recent decades, allowing us to reassess some of the most popular explanations for the recent surge in compensation. Although the stylized facts on executive pay since the 1970s are well established, only a handful of studies analyzed managerial compensation prior to We would like to thank George Baker, Edward Glaeser, Claudia Goldin, Caroline Hoxby, Lawrence Katz, and Robert Margo for their advice and encouragement throughout this project. Very helpful comments have also been received from Doug Elmendorf, Eric Hilt, Antoinette Schoar, Dan Sichel, Laura Starks, and seminar participants at the DAE NBER meetings, AEA meetings, AFA meetings, and EHA meetings. We also thank Michael Weisbach (our editor) and two anonymous referees. We thank the staff at the Historical Collections and Danielle Barney of Baker Library for making the data collection possible and Brian Hall and Jeff Liebman for providing us with their data. Yoon Chang, Yao Huang, Michele McAteer, Timothy Schwuchow, James Sigel, and Athanasios Vorvis provided outstanding research assistance. The views in this article do not necessarily reflect those of the Board of Governors of the Federal Reserve System or its staff. This work was supported by the Economic