The Executive Compensation Controversy - Fondazione Rodolfo ...

THE EXECUTIVE COMPENSATION CONTROVERSY: 24 MAY 2010A TRANSATLANTIC ANALYSIScompensation to company revenues. Nearly two decades ago, Rosen (1992) summarizedacademic research covering a variety of industries and a variety of time periods in both theUS and the Europe, and observed a consistent empirical elasticity of around 0.3, implyingthat doubling compensation increases pay by about a third. Even though there is somevariation in wage-size elasticities, his general conclusion is that the “relative uniformity [ofestimates] across firms, industries, countries, and periods of time is notable and puzzlingbecause the technology that sustains control and scale should vary across these disparateunits of comparison.” The final column of Table 3.3 replicates these earlier findings for our2008 CEO pay data, with pay-size elasticities η estimated from the regression:Ln(2008 CEO Pay) = α + η Ln(2007 Sales) + β'(Industry),where Industry is a set of six industry dummy variables based on Fama-French definitions. 85The pay-size elasticity is positive and highly statistically significant in all countries exceptfor Belgium and Spain. The overall elasticity for Europe (.315) is slightly smaller than thatfor the USA (.394), but nonetheless highlights the importance of controlling for firm size incomparing CEO pay across countries and companies.85 We modify the 5-Portfolio Fama-French classification by creating a sixth for financial services. Ourcategories are Consumer Goods (including durables, non-durables, wholesale, retail, and some services);Manufacturing (including energy and utilities); Hi-Tech (including business equipment, telephone andtelevision transmission, and computer-related services); Health (including healthcare, medical equipment, anddrugs); and Other (including mines, construction, transportation, hotels, business services, and entertainment).-66-