A recap of recent debate and commentary on CEO pay:
First, there was Incentives for the Dead (Krugman) on executive stock options followed by the response Mixed Reviews for Krugman Today (Samwick). This was followed in turn by Power, Changing Social Norms, and CEO Pay (Thoma) and CEO Compensation (DeLong).
This led to an email exchange. First Andrew Samwick asks:
I liked your post on power and social norms affecting CEO pay. You are right--norms have changed. I have as of late been thinking more about how consequential norms are in relation to incentives, and in some cases, how cheap to implement.
I couldn't tell from the link to my post whether you were disagreeing with my statement about average pay:
Apart from the (relatively minor) increase in expected compensation that must compensate the added risk exposure imposed by the pay-performance sensitivity, there is no justification presented for higher levels of pay unless the incentives work, the value of the firm rises, and the CEO's compensation rises via that pay-performance sensitivity.
I think this is consistent with what you quoted from the HBR article. Am I missing something?
To which I responded:
Good to hear from you. My interpretation is that the authors are saying that the level of pay was too low both because they weren't adequately compensated for risk and because of the "uninvited but influential guests at the managerial bargaining table." Thus, when these pressures were alleviated, compensation rose by more than a simple risk premium adjustment would imply.
The other factor is that even if you accept that wages were lower by only the risk premium component (and I still need to be convinced), that does not mean that that subsequent increases justified by the risk compensation argument were limited to this amount. Once the barn door was opened by the argument, given the problems with executive compensation committees, etc., compensation rose by more than the risk premium argument would suggest.
Thanks for your e-mail. I don't think we're disagreeing much--see my next post on this with respect to Brad's post. Based on your e-mail, I think we still disagree on the extent to which we believe that the recent history of option grants to senior management can be attributed to anything Jensen & Murphy wrote or would endorse.
And he ends with this response to DeLong: More on Executive Compensation (Samwick).